biz org - notes

7/31/2019 Biz Org - Notes

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Business Organizations

September 12

Introduction

What is a Business?What is Business Organizations Law about?Basic Forms of Business Organizations

Stakeholders in Business Organizations- Slide diagram

- Biz orgs are used to carry out commercial activities (this means we dontinclude not for profits)

- Because they carry out commercial activities, they have relationships with

many different stakeholders:

- Employees: people paid a regular salary through whom the commercialactivity is carried on. Dont need employees to have a business, might do it allyourself.- Customers: people buying the goods and services producing income for thecomm. activity with the prospect of making money- Financial creditors: give money to the business expecting it will be paid backwith some kind of return over time. Virtually all businesses have financialcreditors.- Trade creditors: supply goods and services to the business but maybe not

paid right away. Common for them to be supplied on credit, payment isdeferred.- Public: success or failure of the biz org has an impact on the local economy.Money made gets recirculated into economy or reinvested. There may also besome impact from the orgs activities depending on their business. Forexample, disposing of waste in an enviro friendly way and the extent that it isnot done, the public is impacted.- Government: a proxy for the public interests, ie; govt enviro regulations forwhat is done with waste. Engage in a variety of sector and area specificregulation as well as general economic regulation. There are also obligationsof the biz org in the ITA to pay taxes on what they make.

- Owners: an internal stakeholder entitled to net economic benefit of thebusiness. Net because the biz has to pay employees, creditors, taxes,warranty commitments, and they are paid ahead of the owners. Their claim isresidual, left after everything else gets paid. This is what defines anownership interest. It is a risky interest as compared to fixed claims ofcreditors.

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- Managers: an internal stakeholder. They run the business may be thesame people as the owners, but as scale of biz increases that is less and lesstrue. When bigger, owners are shareholders, managers are different.

What is biz org law about?

- All of these relationships have legal dimensions.- Contract law governs many of the relationships

- Within employee relationship, employment standards, occupational healthand standards, other kinds of rules employment law/labour law

- With customers, there are consumer protection laws, advertising laws, etc.

- With creditors, relationship based largely on contract

- With public, defined in regards to regulations such as enviro regs

- But biz org is about three things in this context: 1) is the org responsible? -when the biz org is responsible to these various stakeholders how we knowwhen they are liable for tort, crim, contract. Who in the biz org is responsible?Which of the internal stakeholders is responsible for tort, k, crim 2) defines towhat extent the managers have to take into account the interests of thevarious stakeholders in deciding what it is going to do impact on enviro,public, employees, creditors, etc. The extent to which they have to considerthese interests, not things theyre forced to do like follow regs, pay taxes, etc.3) deals with the relationship between the biz org and managers on one hand,

biz org and owners on the other, and the relationship between managers andowners. Provides a legal structure for internal stakeholder relations within abiz org.

Stakeholders in Business Organizations- Slide diagram Sole Proprietorship- One person carrying on a business, the manager and owner of the business,but may have employees. Only one person entitled to manage and own it.Distinct feature of the SP: there are no separate stakeholders internally butall the other relationships still exist.

Sole Proprietorships- Formation individual carries on business for his/her own account.

Characteristics:- SP is sole owner all assets are owned by them (ex: trucks, ladders,inventory in construction business)- SP cannot employ self no person with whom they can enter k.

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- All benefits accrue to SP as sole owner, all residual benefits accrue to theSP- All obligations are SPs personally, for example:Contracts SP solely responsible for all obligations. Doesnt matter if heshired employees who may have undertook to do the work if it isnt done or

not consistent with the agreement for the job, SP is responsible.Torts SP solely responsible for tortious acts of self or employeesIncome Tax all income from business is taxed to SP, included in income taxreturn subject to any expenses that might be earned in connection to earningthat income. Any losses associated with the SP may also be deductiblesubject to limitations under the ITA.Unlimited personal liability a key feature of SP. It is not restricted in any wayto the business, or the assets of the business to be more specific. If a claim ismade regarding the failure to perform a k, and customer sues, liability can goto not only the assets of the business but also their personal assets like moneyin bank account, personal car, etc. This limits the SPs practical utility in the

marketplace, they are not used in large scale businesses because they wouldleave themselves open for large scale liabilities. This unlimited personalliability is a disincentive to having an SP. You could manage the risk by takingout insurance but this can be costly, and there are still limitations for what youcan get insurance for. Cost might not really justify the protection you get.Could also contract out of responsibility limiting liability, reducing damagesto which you are liable. Bit of a cost, but it is also limited to judicial reluctanceto enforce, and also only relates to those you are contracting with. If you hurtsomeone in the public, no contract protecting you.

- Financing: another limitation of the SP only one option, you borrow money.

With other forms of biz org, wider variety of raising money ie; selling shares ina corporation.

- SP law is thin doesnt provide organizational structure dealing with how youwould have more than one person involved. Another limitation as you have tocreate it entirely by yourself through contract or whatever.

- For these three reasons, SP may be brought into being very simply but hasthese disadvantages that make it less useful in a large scale biz org, at leastcompared to alternatives.

Stakeholders in Business Organizations- Slide diagram Partnership- the partners are the owners and managers- what defines the partnership compared to SP is that there is more than oneperson who is the owner and the manager. At least two people carrying on biztogether.- but like SP, no distinction between biz org (the partnership) and the peoplewho are the partners

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Partnerships- Formation 2 or more persons carrying on business in common with a viewto a profit. A legal definition coming out of the Partnerships Act (s. 2).

Characteristics- Internal relationships (with other partners), that we dont have to deal with inSP: the legal characteristics of this relationship are governed by default rules(meaning they apply unless the parties agree otherwise) in Partnerships Act(ss. 20-31)- Partners are sole owners: but limits on what can do with partnership propertysince there is more than one person. They cant use partnership property fortheir own personal benefit, have to use it for partnerships benefit.- Partner cannot be an employee- All benefits of partnership accrue to partners: residual after everyone elsegets paid.

- All obligations of partnership are partners personallyContracts each partner responsible for all obligations in course of firmsbusinessregardless of which partner actually commits the partnership to doing it. If 10people in partnership, one commits firm to something, others dont agree,partnership is still responsible for the performance of the obligation.

Torts each partner responsible for tortious acts of self, other partners oremployees in course of firms business. One partner negligent, all partnersare responsible.

Income Tax all income from business calculated at the partnership level andtaxed in the hands of the partners. A bit different from SP context partnersindividually pay tax on their interests in the business. Have to pay tax even ifnot distributed to them in the form of cash. If they keep the money in the firmto reinvest into it, they still have to pay tax on the income.

- Each partner has unlimited personal liability: same as the SP case, allpersonal assets and business assets may be taken for any claim made. Butindividual partners can be insulated from the liabilities incurred by otherpartners if it is a limited liability partnership (LLP). This is a huge benefit forindividual partners.

Partnerships- Liability of partnership (and thus partners) to third parties is governed bymandatory rules in ss. 6-19 of the Partnerships Act. This doesnt apply to SPbecause there is no unauthorized behaviour, only one person making thedecision.- Each partner is an agent of the partnership: may bind the partnership whenacting in the normal course of the partnership business. Risk of unauthorized

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behaviour allocated to the partners. Third party entitled to hold thepartnership liable when it is reasonable to think that it is a partnershipobligation. Harder to argue if the behaviour is not reasonably connected tothe firms business. See s.6 of Partnerships Act.

How to manage risk of unauthorized obligations?Legal Protections- Partnership agreement most have a contract where they address the risk ofunauthorized obligations. No impact on third parties as that is mandatory, butmore about the allocation within the partnership. Ex: a rule that no singlepartner can sign off on an obligation without conferring with somebody else. Ifthey didnt confer, they might have to agree that they will pay to the partnersfor whatever they become liable for to the third party as parts of thepartnership indemnification committments. Management and controlprocedures in place to try and restrict liability.- Law of partnership fiduciary duty: partners obliged to always act in the best

interests of the firm, not put their personal interests ahead.- Limited Liability Partnerships under Partnerships Act (ss. 10, 44.1): noteveryone can take advantage of this, certain requirements of the profession

Practical Protections- Relationships of trust and confidence: historically partners have been smallgroups of people that all knew each other. This means there wouldautomatically be some trust/confidence built into the partnership from thebeginning. An informal factor, no legal requirement but often exists.- Opportunities for informal monitoring: working together, can keep track ofwhat other people are doing.

- BUT: the effectiveness of both diminishes as size of partnership increases maybe multiple offices across prov, country. Need a set of rules whererelations of trust and confidence, opportunities for informal monitoring dontexist so they turn to a LLP to do this.

Stakeholders in Business Organizations- Slide diagram: Corporations- Shareholders are like owners because they have a residual claim to theassets of the corp after everyone else is paid. But this is subject to a varietyof rules both in statute and in the provisions which define the characteristicsof the shares. Shares represent bundle of rights and claims against the corp.

Corp as separate legal entity that owns the assets, subject to liabilities,receives benefits.- Directors and officers are functionally managers. Elected by the owners.- These groups exist separately from the corp that is a key feature of a corp.A corp is a separate legal person.

Corporations

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- Formation filing incorporation documents with appropriate governmentauthority. Doesnt happen automatically like SP or partnership does. Govthas to issue certificate, only at that point does it come into existence.

Characteristics

- Separate legal entity separate from shareholders this completely changeshow we deal with the corp compared to the other biz orgs- Corporation itself-- carries on business-- owns property of business--solely responsible for obligations of business:ContractsTortsTaxessolely entitled to income from business

Implications of separate legal existence- Person can be shareholder, creditor and employee- Shareholders not liable for obligations of corporation (generally). Impreciselydescribed, shareholders have limited liability they cant lose any more thanthey have invested into the corp.- Corporation has perpetual existence- Must act through human agents

Separation of ownership and management- Conceptually and, sometimes, practically- Managed by board of directors (often delegated to officers) elected by

shareholders- Not shareholders directly- As businesses become larger, there is a tendency for separation:- Shareholders ELECT directors who APPOINT officers this creates someissues

Issue How do shareholders ensure that management (directors and officers)act in their interests?- Negligence by management: mgmt shirking responsibilities negativelyimpacting income of the corp, reducing the value of their shares.- Putting management interests ahead of shareholder interests: directors and

senior managers paying huge salaries to themselves not justified by thebusiness- Favouring one group of shareholders over another: directors elected byshareholders, and if there is a majority shareholder, they can control theoutcome of election. Directors may be tempted to do things favoring themajority shareholder over the interest of the minority. Ex: director approvingthe sale of a corp asset to a majority shareholder for less than it is worth.

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Corporate law responses to concerns- Controls in corporate constitution (articles aka document filed with govt tobring corp into existence, by-laws and shareholder agreement)- Duty of care, fiduciary duty and obligation not to oppress: behaviouralstandards

- Access to information: distributed to shareholders to keep track of mgmtactivity- Shareholder voting: electing directors on periodic basis- Shareholder remedies: where obligations of directors/officers not satisfied

In small corporations with few shareholders separation more legal than real

Readings for Next ClassVanDuzer pp. 28-49Casebook pp. 6-15

September 14

- next class read question 1 from 1997 exam online- Van Duzer 49-63- Casebook 31-34

Sole Proprietorships and Partnerships (Part II)

Sole Proprietorships- Obligations applying to all new businesses apply to SPs upon

commencement of business. Eg: licences under Municipal Act; Securities Act;Registered Real Estate Brokers Act

- Registration of SP name under Business Names Act required if: carrying onbusiness AND using a name other than persons own name (s.2(2)). Need toregister because it is a public record of the name being used and the personwho is using it. This is important so the person with whom the businesscontracts can figure out who the individual is that is responsible for theobligations.

- The key is that the trigger for both is carrying on business

- Registration under Business Names Act: if you do not reg when you have to,you cannot sue in ON to enforce business obligation (s.7), will be liable for afine of up to $2,000 (s.10). As a practical matter, this fine is never enforced,but there is potential, so you need to advise clients about it regardless.-- These are incentives to get you to register, so there is public record whichcan be relied on by those dealing with SP to identify individual who is liable forSPs obligations. You may want to register even if you do not have to, to put

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others on notice that the name is in use. A benefit of this is that if someoneregisters a name misleadingly similar to yours, you have a statutory right tosome damages. If you have a client starting a business as an SP orpartnership, you might want to search this registry to see if such confusionmay arise.

- There are no legal entitlements created to the name by way of thisregistration. It is not like an intellectual property right. You might be able toargue that your business name is a trade-mark, but they are not affected inany direct way by this reg system.

Partnerships

Recap: formation 2 or more persons carrying on business in common with aview to a profit (Partnerships Act s.2)

3 Types of Partnerships:

(1) General Partnership (or simply, partnership): each partner has unlimitedpersonal liability for all obligations of the firm/partnership (Partnerships Act ss.6, 10-13)

(2) Limited Liability Partnerships: same as general partnership EXCEPT partnernot personally liable for obligations of (i) another partner arising out of thenegligence of another or employee or (ii) the partnership (with exceptions)ss.10, 44.1. Referred to as full shield limited liability partnership protectspartners from all liabilities of the firm itself. The partnership is still

responsible. This means that the assets which are partnership property, usedin the partnership business, may be taken by a creditor of the partnership.The limited liability regime prevents creditors from claiming against individualpartners personal assets. If there is a successful claim against thepartnership, the assets of the partnership may be used to pay off the claim and this reduces the value of each partners investment in the partnership, butpersonal assets are still protected.

(3) Limited Partnership: at least one general partner (unlimited personalliability) and one limited partner (liability limited to amount contributed topartnership). Limited Partnerships Actss.8, 9. Example: somebody starting a

business, wants to raise money for it. May use this form of partnership wherethey sell units to limited partners in exchange for cash. In this way, no claimagainst their personal assets. The general partner takes more liability, limitedpartners are more like passive investors.

- All general and limited liability partnerships have to register under the ONBusiness Names Act (s.2(3)). Licensing and other requirements also apply.

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- Scheme ofPartnership Act:-- nature of partnership (ss.2-5)-- relationship of partners to persons dealing with them (ss.6-19) mandatoryrules-- relationships of partners to each other (ss.20-31) default rules

-- dissolution of partnership (ss.32-44)

- The law of partnership evolved out of English common law. This means thereare a lot of provisions that are hard to understand, or dont fit well into modernbusiness activities. So what becomes more important are partnershipagreements to customize the relationship, to more effectively their objectivesin the contemporary marketplace.

Formation of Partnership- Partnership = relation between persons carrying on businessin commonwith a view to a profit(s.2)

- These three elements are objectively determined. The court decides basedon all the circumstances whether your relationship meets these requirements.A finding of partnership may be inconsistent with the parties subjectiveintention. They may have entered into an agreement explicitly saying theyare not partners. Court is not bound by this, they look at the wholerelationship and decide whether it fits within the definition.- People might not want to be partners because they dont want to protectthemselves from unlimited personal liability.

(1) view to a profit: need not actually make profits but not charitable,social or cultural purpose. If youre looking to just cover your costs, not a biz

org (SCC decisions in Continental Bank; Spire Freezers and Backman)

Spire Freezers:F: existing partnership with two businesses. One apt complex, one condodevelopment. Condo was losing money. To deal with this, made a plan to sellinterests in the partnership to businesses like Spire Freezers, and then buy themoney losing condo development from the partnership triggering a loss of$10M. Goal was that profitable businesses buying interests get to deduct ashare of the losses against their income. Rev Canada didnt want to allow thededuction because it was not carrying on a business just bought an interestfor the sole interest of deducting the loss.

R: SCC: there was a view to a profit because Spire continued as a member ofthe partnership while it was carrying on the second business of thepartnership, the apartment complex. They continued to manage it, earnedprofit from it. They didnt make enough to cover the loss incurred, but it was areal business and was being carried on in a profitable manner. If the mainpurpose was to get access a loss to deduct, so long as there was a secondarypurpose of carrying on a business toward profit, it is OK.

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BackmanF: Transaction similar to Spire, but one difference no business left afterproperty sold triggering the loss.R: Because no business being carried on with view to a profit, SCC denied thededuction of the loss.

- So how do you know where to draw the line, how much business do you needto have in the partnership to fall into Spire rather than Backman? No realanswer have to have some business being carried on, but how much, hard tosay.

(2) in common: together or jointly carrying on a business. Based on somekind of agreement. It need not be express, court will infer an agreement fromthe parties behaviour, but agreement must be given effect through actionsdirected to carrying on a business, extend to all the essential elements of apartnership.

Red BurritoF: Two people entered into agreement to carry on a restaurant business.Wanted to create corp, create a bank account for the corp. But they never gotaround to it. One party had a lease on business premises. Agreement saidthe premises would be renovated, and money would come from partnercorporation Red Burrito. Renovations done, restaurant opened. RB andpartner disagreed locked out RB, and they didnt get benefits from therestaurant. RB sued alleging partnership.R: They did not agree to a partnership, but a corporation, although they didntget around to making it a corp. RB argues that what they in fact did was a

partnership court agreed that it was a partnership because they adequatelymet the three requirements.+: No express agreement to create a partnership, but it was shown in adifferent way.

p. 39 case:F: About requirement dealing with all essential elements of a partnership. Twoparties thinking they had a partnership, they referred to each other aspartners, gone some way to set it up.R: But they hadnt dealt with two items: when the business was going to getstarted, and what each partys contribution should be without these, court

found no partnership.

(3) carrying on a business: business defined broadly (any tradeoccupation or profession s.1) and interpreted broadly (Thrush v. Read[business can mean anything, even a single transaction], Khan v. Miah [F:two parties take steps to open a restaurant, bought land, advertised, tablecloth cleaning, but never opened it. So was it a partnership or not? Oneargued there was no business, they never sold anything. R: Everything they

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did was directed toward carrying on a business, fact they didnt take the laststep is not determinative. So it is a business.) The principal indicia of carryingon business together is sharing profits.

Why sharing profits?

- Sharing profits is an imperfect way of identifying when parties are carryingon business together.

- Profits = revenues (sales, fees, etc.) less expenses (cost of inputs, wages,costs of manufacturing and processing, etc.)

- If sharing profits, a person is concerned not just about sales, but alsomanagement. An ownership-like interest, a residual claim return depends onhow successful the business is. Profit is what is left after everybody else getspaid. That is the kind of interest an owner, a SP has.

- But sharing profits is not enough in itself, it depends on context (PartnershipsAct s.3). There are some situations in which sharing profits does not createinference of partnership. Some examples:

Eg: s.3.3 (not exhaustive)- repayment of debt out of profits- compensation to lender in the form of share of profits or interest rate varyingwith profits- employee profit sharing- annuity to spouse or child of deceased partner out of profits- payment of purchase price for sale of business out of profits

Cox and WheatcroftF: B.Smith and Sons have an iron works business. Have creditors includingCox and Wheatcroft. Business is struggling. Creditors concerned they wonthave debts paid off. They enter into an arrangement: agree that Smith andSons will transfer title to trustees appointed by creditors to run the business.They take direction from creditors, creditors decide if business should bewound up, etc. Smith and Sons assigns its right to profits to the creditorsunless and until they are fully repaid. The amount owed to the creditorsdoesnt change. This is called a receivership today. While the business isbeing carried on by the trustees, there is a creditor who lends money to the

business which is not paid lawsuit then alleges that Cox and Wheatcroft arepartners in this business.R: Court is trying to address whether a partnership should be found.

- Addresses the scenario whether someone is a partner or not comes up. Acreditor of an existing business is unpaid. Looking for someone with money tosue. The people carrying on the business/responsible not worth suin as theyhave no money. Hickman, a creditor, alleging that Cox and Wheatcroft, also

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creditors, are partners. Basis: they have appointed trustees, the business interms of legal title has been transferred to trustees who run the biz on dailybasis. They also give directions to trustees how the biz is to be carried on, canreplace them, can direct them to wind up the business and sell off assets topay down the debt. Anything left after biz of trustees carried on, B Smith and

Sons get it back.- So Hickman says: theyre getting the profit, so they should be partners therefore they are personally liable for obligations of the biz, and that meanstheir assets go to me.- Previously, the court said sharing profits = partnership. But the court heredoesnt say its so simple. We looked at s.3(3) setting out five examples ofrelationships with sharing profits but inference of partnership should not bedrawn.- H of L want a different test: for Cox and W to be partners, have to find the bizis being carried on for their benefit, the agency basis for partnership beingcarried on by agents on behalf of the partners.

R: H of L this is not the relationship here. It is a debtor-creditor relationship.The debtor has agreed that the biz will be carried on for repaying thecreditors. This doesnt transform the nature of the obligation into partnership.Simply agreement by debtor about how the debt is going to be repaid. Theyget the rest after creditors paid. Even though profits are shared and thecreditors control a lot, still not enough to change it into partnership.+: The agency test is the test that has survived. Still the basic test we use forwhat a partner is.

September 19

Partnerships

Factors indicating partnership-- Common ownership: not of itself create partnership (s.3.1)- Mere fact that co-owners intend to acquire, hold and sell for a profit does notmean there is a partnership- Right of co-owner to deal with his/her individual interest in propertyseparately incompatible with intention that there be a partnership. Even ifright is subject to right of first refusal (AE Lepage). May be shown by howco-owners file income tax (ex does each make own decision regarding capitalcost allowance deduction? AE Lepage)

- It is not easy to draw bright lines when a simple co-ownership relationshipturns into partnership, but two ways: (1) assets being used to carry on abusiness (vacant land to shopping centre) (2) engagement of allegedpartner/co-owner in the management of that business

AE LepageF: Looking at the nature of the ownership interest that the partnership has.Apartment building with bunch of co-owners. A,B,M. Agreed to share any

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profits in proportion to their interest in the apartment. Would also contributeto any losses also in proportion to interest. They were each able to sell theirinterest independently to a third party any time they wanted to. Onlyrestriction in agreement: had to give a right of first refusal to other owners.Right of first refusal: before selling, have to offer to other co-owners first.

Arises in a variety of contexts. In terms of selling the whole property wouldrequire majority vote of the owners. So, one of the owners, M, entered intoreal estate listing agreement with AE Lepage to list property for sale. M hadno authority from other partners. Eventually was sold not through whatLepage did, but sue for their commission as part of their contract. Lepagesues the partnership for its commission. Co-owners: M not acting withconsent, no partnership, so whatever claim they have against M isnt againstthem.R: Court agreed with co-owners. The right of first refusal doesnt mean this isa partnership it doesnt really limit the ability of any co-owners to sell, justhave to offer it to them first. Court looked at their income tax returns. Noted

that each of the co-owners made individual and different decisions about thededuction of capital cost allowance in the apartment. The value deducted fromproperty to account for depreciation of property. So each owner made anindividual decision about whether they would take it or not. They werefundamentally allowed to deal with the property however they wanted. If thiswas a partnership, couldnt have done that. The property would need to beused for partnership, until the partners agree to do something else with it.Agreement was just about regulating common interest in their co-ownedproperty.

Common Ownership

VolzkeF: Two corps in partnership B and W B owns 80% of shopping centre, Wowns 20%. Decided to do renovations, got V to do construction. Never paid, Vsues alleging there is a partnership carrying on the partnership business. Vwants to get assets from W because it had more assets. Is there a partnershipbetween these two?R: There is certainly co-ownership, and other indicators like engagement inmanagement that is relevant. A list of ways that this looked like a partnershipinstead of co-ownership included below:

- involvement in mgmt may transform co-ownership into partnership- so, indicators of involvement in mgmt- Common bank account- shared costs as well as profits- spoke of each other as partners- participation in financing- finding in prior litigation- sending tenants and prospective tenants to Bonel

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- repairs to shopping centre premises

- The court said in Volzke that the involvement in mgmt need not amount tocontrol. So even with 20% interest still can be partners.- Participation in mgmt or other contribution is also not necessary (No. 41

called W v. MNR: partners agreed to be partners)

No 41F: Patent agents. Agreement between partners that widows of them wouldreceive a share of the partnership profits on on-going basis. Widows didntparticipate in business any way. Simply received benefits. In the agreement,widows acknowledged they were responsible for losses of the business. MNRarguing that the widows werent contributing anything so the amount shouldbe taxed in the hands of the contributors (since they were paying tax at ahigher rate)R: Responsibility for losses in the biz key factor in finding the widows partners.

Specifically undertaken to be responsible for losses, carried on for theirbenefit, should be considered partners. Three important points: (1)involvement in mgmt for finding partnership at least where parties haveagreed to be partners. Critical aspect is the agreement to be partner and toexplicitly agree to share responsibility for losses. (2) the determination of thelegal status of people under partnership law is determinative of the taxoutcome. This is the same as corp law in general. The corp law outcome willdetermine the tax effect of the transaction. (3) after this case, MNR wassuccessful in having the rules changed to specifically address this situation for tax purposes, if youre partner, youre taxed on the basis of an amountreasonable based on your contribution. So you cant do this anymore money

is taxed in the hands of the people who are making the contributions to thebusiness.

Factors indicating partnership (p.48)- none of these factors are conclusive- sharing profits- sharing responsibility for losses, cinluding guaranteeing partnership debts- jointly owning property- controlling partnership business- participating in mgmt- stating intention to form partnership in k

- making govt filing showing partnership (eg registration under biz nameslegislation, tax returns)- access to information regarding the biz- signing authority for ks, bank accounts- holding oneself out as a partner- contributing money, services or property as capital money made withoutfixed arrangement for repayment, not like a loan (esp if contribution iscomplementary to the contribution of others for the purpose of running a biz)

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- full-time involvement in the business- the use of a firm name, perhaps in advertising- the firm has its own personnel and address

- so starting point is s.2 partnership definition, then factors that are relevant

for determining the definition. The key starting point is agency from Cox andWheatcroft, then all the factors on top of it.

Question 1 from 1997 Examination

Existence of Partnership- Fact pattern of the question included

Question 1 from 1997 ExamBram is a successful real estate developer and was Sherrys largest client. Heleft his wife and is anticipating a custody battle for his two children. Sherry

referred him to Amman, introducing him as her partner. Bram told Ammanthat he has great faith in Sherry and was confident in anyone who was herpartner.

Amman missed a limitation period in connection with Brams litigation andBram is furious.

QUESTION:You are a lawyer to whom Bram has come for advice. Assuming Amman isliable for negligence, is Sherry liable as well? (TWENTY (20) MARKS)

- Where do you start? Think about the legal basis that her liability could arise,and that would be through a partnership (at least at this point). Also look atwhether this was a joint venture (well learn about this later). So we will onlyfocus on partnership. If S and A are partners, she would be responsible for hisnegligence, found in ss.10,11 of Partnership Act.

- Is there a partnership? Look at s.2 two or more people, carrying on biz withview to a profit. Address those three things. Is As business being carried onfor Ss benefit? This is the agency question, and probably the most importantaspect of this question.

- Did they enter into an arrangement? Entered agreement, run firm together- View to a profit? Not doing their work for free, substantial aspect of thebusiness, carried out in common

- One of the key things against this being a partnership: they arent reallysharing profits. If A makes a ton of money in a month, arguably not muchbenefit to S.

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- They signed an agreement they are not partners. So if we wanted to arguein the contrary wed have to address that fact.

- Other things you might like to know about this relationship not put into thefacts: was B still really a client of S, their govt filings like tax returns, biz

names act registration, reporting to law society re: trust accounts

- Is there any argument that this is an LLP? We havent talked about thisbefore, but you need to have a name with LLP at the end, have to separatelyfile, have to have an agreement to be an LLP

Partnership Act rules governing relations of partners to each otherWhy default rules, since they apply to the extent that partners dont changethem?- Better to have rules in Partnerships Act than buried in Common Law- Encourage people to engage in business by reducing transactions costs.

Give a kind of standard form contract to govern their relationship: extent ofbenefit depends upon how closely Partnerships Act standard form contractresembles what people would have agreed to if no impediments tonegotiation. If the rules dont fit for them, and they dont agree to change therules, can be a trap for the unwary they are stuck with them.- Give parties flexibility to customize partnership relationship to reflect theirparticular circumstances

Nature of default rules?- Based on archetypal conception of partnership: Small number of persons whoparticipate equally, financially and in management. Partnership is no more

than the partners who make it up: continuation of each partner in partnershipis essential to the continuation of the partnership itself- Often these big picture assumptions dont apply: in which case rules are trapfor the unwary

p. 50- Each partner shares equally in capital and profits and must contributeequally to any losses (s. 24.1) but in a law firm not everybody gets the samepay. So it is almost always changed in partnerships, even small ones. Thecontribution to capital is also quite variable.- Each partner is entitled to be indemnified in respect of payments made or

liabilities in the ordinary course of business or to preserve the business orproperty of the partnership (s. 24.2)- A partner is not entitled to interest on capital (s. 24.4) no immediateexpectation of fixed return on the debt- A partner is entitled to interest at 5% per year on excess contributions (s.24.3) parties need to address what the capital is, who is contributing whatamount- Each partner has a right toparticipate in management(s. 24.5)

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- Decisions regarding ordinary matters decided by a majorityof partners innumber (s. 24.8)- Each partner has equal access to the partnership books (s. 24.9)-Admission of a new partner (s. 24.7) and any change in the nature of thepartnership business (s. 24.8) require unanimous consent

- No majority of partners may expel a partner (s. 25)- Any person who takes an assignment of a partner's interest has no rights asa partner, except to receive the share of the partnership profits (s. 31)-Any partner may terminate the partnership by giving notice (ss. 26 and 32)-Any variation of the default rules requires unanimous consent(s. 20)

Partnership Actrules governing relations of partners to each other- Fiduciary Duty Hitchcock v. Sykes: To act in the best interests of thepartnership- Obligations consistent with fiduciary duty, giving effect to the basic rule:-- Render true accounts and full information (s. 28) cant keep secrets, tell

them what is going on with anything related to the interest of the firm-- Account to firm for any benefit from transaction concerning partnership oruse of partnership property, name or business connection without consent ofpartners (s. 29)(Rochwerg)-- Not to compete with partnership or must account for profits (s. 30)(Mohammadamin)-- Remedy in last two is an accounting for profit: if you obtain a benefit fromeither of these things, you have to account for them. Creates disincentivefrom engaging in that behaviour, as you wont be able to retain any benefit.

Rochwerg

F: Accounting firm. One asked to be a director of a client. Accountant entitledto receive directors fees and to buy shares of the client, with the option tobuy more. A became director, declared the fees to the partnership, paid themover in recognition to his obligation, but the benefit he obtained throughinvesting in the shares he felt shouldnt be associated with the firm, as he hadto pay the money for them. Other partners challenged any benefitassociated with the shares should go to firm because if he hadnt beenworking for client with firm wouldnt have had access.R: Court agreed with the other partners. Without the work being done onbehalf of the firm, wouldnt have got the opportunity.+: You need to think in the context of your partnership about these possible

benefits that may come up, where people get individual awards for things.

MohammadminF: Car parts business, partner quit and set up competing business down theroad.R: Inconsistent with fiduciary duty obligation extends beyond the time thatthe person is legally a partner.

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Partnership Property (ss. 21, 22)- Once property-- contributed to partnership,-- acquired on its behalf or for the purposes and in the course of thepartnership business or

-- bought with partnership moneyit becomes partnership property- Important legal consequence: Must be held and used exclusively forpartnership purposes and in accordance with the partnership agreement. Theperson is not allowed to change their mind, the other partners can be withintheir rights to deny them the ability to withdraw the property. What would youdo about this? Need an agreement up front about what is partnership propertyand what is not need to think about these things before the problem arises.Once a problem has arisen it is difficult to get an agreement becauseeveryone will behave differently based on the situation. So we advise peopleup front, create structures for their relationship up front to avoid problems like

this.- Applies even if individual partner continues to hold propertyi.e. partner cannot sell property that he/she owns if has become partnershipproperty

Partnerships Act rules governing relations of partners to third parties (ss. 6-19)- Govern when partnership liable to third parties- Mandatory-- But can address consequences in partnership agreement-- Reduce likelihood of unwanted liability-- Management and control arrangements

-- Provide for indemnificationBUT agreement has no impact on liability of partnership or partners to 3P

Basic Rules- Partner is agent of partnership: partner has some authority to bind thepartnership and the scope of that authority is defined in the Partnership Act.The partner has the ability to create liabilities/obligations on behalf of the firm.The firm incurs obligations based on what the partners do.- Partnership liable for-- Obligations incurred by partner carrying on, in the usual way, business ofthe kind carried on by the partnership UNLESS Partner had no authority in fact

AND Third party dealing with partner knows of lack of authority or does notknow or believe him to be a partner (subjective knowledge)(s. 6). Ex: law firmaims to give legal advice but many do other things like estate trustees,investment advice, etc. That is not law, but things like that define the scopeof the partnership business, liabilities and obligations that it creates. If yougive investment advice, that is part of the firm business. If it is negligent, thepartnership is likely to be found liable because giving it was part of theordinary scope of the business even though they only really set out to practice

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law. It is about the practical operation, what actually goes on, rather thanwhat is generally the scope.-- Wrongs in ordinary course of business of the partnership or with authority ofall partners (s. 11) applies to torts including fraud (e.g. Falconi). How is fraudpart of the ordinary course of business?

FalconiF: lawyer advising a client about how to fraudulently dispose of their propertyin anticipation of their bankruptcy by transferring it to friends and relatives,which would defeat the claims of creditors. This is prohibited under the BIA.Partner found liable for the fraud is the firm liable as well?R: Was the fraud in the ordinary course of partnership, or with the authority ofthe partners? The court said the test is whether the unlawful acts are of thesort that it woud be within the scope of the partnership if it were done forlegitimate purposes. The lawyer was doing something that is the kind of thinglawyers do, drafting agreements for the transfer of property. That was enough

to say the fraud is covered, and the other partners were found to beresponsible.

Basic Rules person liable as partner where held out as a partner and- This is for liability of a person who is not a partner. Previously was for peoplewho are partners.- Person held out (any representation that you are a partner) self or knowinglypermitted self to be held out (knowledge of a general holding out sufficient).Can be a general holding out to the public at large, doesnt need to be to thespecific person AND- Holding out is to person who advances credit to the firm on the faith of the

holding out (reliance dont have to actually advance credit, but that youhave relied on the person being a partner, recall question from 1997 exam) (s.15) (Tower, National Building Society)- May be liable under s. 15 even if never were or no longer are a partner. Anindependent basis for liability may be something seen on exam recall 1997question. One of the bases for the claim was not only that they were inpartnership, but alternatively that there was a holding out within the meaningof s.15.

TowerF: Partnership with two people. One partner leaves, said to the other person

carrying on business, they are not a partner, take them off the letterhead,disassociate from firm. Person left had old letterhead paper with old partneron it, used it in connection to enter into k with third party. Default oncommitment. Third party sues and alleges person left still a partner becauseof letterhead.R: Applying s.15. Person is not a partner, but have they been held out,permitted themselves to be held out? No, didnt allow themselves, gaveexpress directions to not be held out. Not a sufficient basis to apply s.15.

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National Building SocietyF: law firm giving opinion that turned out to be wrong, negligent. Onletterhead of firm, list of lawyers including Lewis. L was not a partner,associate. Client sued Lewis alleging he had been held out as a partner on the

letterhead.R: Court willing to accept that L was being held out and he was consenting toit, but claim was unsuccessful. Client had not relied on L being a partner relied on the opinion to their detriment but L was not part of the file, didntfigure in what gave rise to the negligence. Indicates the importance of thereliance component for establishing liability.

- Say there is a partnership with $90,000 assets. There is a claim against thefirm for $50,000. D enters into the partnership with $10,000 in assets, makingpartnership assets $100,000 for a 10% interest. The litigation claim iscommenced and is successful so the assets of the firm are reduced down to$50,000. If youre D, you bought a 10% interest for $10,000 but it is now onlyworth $5,000 or 5% in comparison to the original interest. What should you doto avoid this if you were D? Should see whether there are claims against thefirm might not be easy to find. Need existing partners to say there are noclaims, or agree and tell you what the claims may be. On top of this, youdwant an indemnity agreement for situations like this prior to joining them.

Maybe increase interest to 20% or cash payment, or some other solution.

- What happens when you leave? With reference to diagram above thestarting assumption is the person not liable for new obligations arising afterthey leave. Unless creditor dealt with firm before their retirement entitled toassume the partner who left is still a partner. They will continue to be liablefor new obligations to that existing creditor client. But there are exceptions:either creditor didnt know D was a partner prior to their retirement, so no

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French text - Subsection 10(3)Le paragraphe (2) ne dgage pas lassoci dune socit responsabilitlimite de sa responsabilit au titre de ce qui suit :a) b)

c) les actes ou omissions ngligents ou illgitimes que commet un coassociou un employ qui nest pas plac sous sa surveillance directe si les conditionssuivantes sont runies :(i) les actes ou omissions taient de nature criminelle ou frauduleuse mmesil ny a pas eu dacte criminel ou domission criminelle proprement dits, [ormissing] so under French version it would seem that if you were making aclaim against a partnership, the shield of liability does not ioperate if it wasfraudulent and they were aware of such thing.(ii) lassoci avait connaissance ou aurait d avoir connaissance de lacte oude lomission et na pas pris les mesures quauraient prises une personneraisonnable pour empcher quil ne soit commis.

+:

Limited Liability PartnershipsFormed by- Satisfying requirements set out in ss. 44.1 to 44.4- Sign agreement designating as Limited Liability Partnership must bewritten agreement(s. 44.1) For a general partnership, you dont need to havean agreement, but for an LLP, need it in writing.- Registering under the Business Names Act (s. 44.3), which all partnershipsare required to do.Note: Extra-provincial limited liability partnerships governed by liability rules

of home jurisdiction despite carrying on business in other jurisdiction, but mustregister under the Business Names Act (s. 44.4)

Other Requirements:- Partnership carries on the business of a profession governed by a statute andthe statute permits limited liability partnerships. Permitted for lawyers by LawSociety Act s. 61.1- The governing body of the profession requires mandatory minimuminsurance for all members of partnership. The LLP says to consumers that theonly person you can hold responsible is the person you are dealing withdirectly. So in order to support this everybody needs to have insurance to

cover possible claims.- Partnership name includes words or abbreviation indicating limited liabilitypartnership(e.g. LLP or SRL). Show that there is a different allocation of risk compared toif you were just dealing with a regular partnership.

Dissolution of Partnership

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Partnerships are fragile in the absence of agreement to the contrary can bedissolved easily and in multiple ways:-- Expiry of fixed term (s. 32(a))(e.g. Pooley: parties agreed pship last 14years)-- Termination of single adventure or undertaking (s. 32(b)) normally

associated with joint ventures. People coming together, combining theirresources for a limited purpose. If you have that kind of situation, and it is apartnership when the common purpose is formed, then it is terminated whenthat is done. Furthermore, it has to meet the level of being a business.-- Partner giving notice of intention to dissolve (ss. 32(c), 26): in absence ofagreement to contrary, can end whenever they want, unilaterally. Typicallydealt with in a partnership agreement: cannot be dissolved on notice of oneperson, person looking to leave has to give proper notice. Matthews case:pship agreement said partner cant leave without 6 months notice. But pshipagreement didnt say that the partner was prohibited from dissolving the firm.Guy wants to leave, restricted by 6 months, so wanted to dissolve the firm.

Court said that the parties must have meant that an individual could notterminate the firm either, gave a generous reading to the pship agreement.-- Death or insolvency of any partner (s. 33(1)): this is also not practical forlarge firms. Typically changed in partnership agreements as well.-- Partner permits share of partnership property to be charged for his or herseparate debtat option of partnership (s. 33(2)): contemplates scenario where partner goesto bank, says they have interest in partnership and wants to borrow money.Bank asks for security on the loan, bank takes interest in partnership. Butpartner doesnt have separate property interest in the firm. This should neverhappen. Anamolous provision that should never come up for us.

-- Business of partnership becomes unlawful (s. 34): ex - all lawyers in firmbecome disbarred-- By court order (s. 35): if partnership agreement changed the circumstancesfor dissolution, may need to go to court. Different grounds for court to rely onin making an order to dissolve the firm. Last one is catch-all, where it is justand equitable to dissolve the firm.

s.44 of Partenrships Act: when pship is dissolved creditors get paid off first.Anything left goes to advances made by partners, then capital paid back.Anything left after that distributed to partners according to their profitentitlements. If the partnership is insolvent, may have to go under the BIA.

Partnership AgreementsPurposes- Reproduce Partnership Act provisions for partners' information: can be usefulsince this is where people would naturally first look. But some want tominimize the size of the agreement.- Modify standard form provisions of Partnership Act (ss. 20-31, 32) toreplace; or

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supplement - extend and tailor to the particular needs of the partners: definingto what each thing the default rules apply- Respond to mandatory provisions of the Partnership Act especially ss. 6-19 risk of unauthorized liability to third party

Issues in Partnership Agreements- A non-exhaustive list of issues. Instead designed to focus on the defaultrules.

Name- Ownership issues: typically a concern when somebody leaves.- Liability issues: still liable to people thinking you are a partner when youleave the firm but they still use your name- Registration issues

Description of business

- Recall s.6 that every partner is an agent of the firm. Also recall that thescope of a business is what it actually does so why both describing thebusiness? You want to inform all the partners expectations about what thebusiness is supposed to be. Most will respect this. So there is a value for theparties to actually do this, in three specific examples:- Clarifies parties intentions regarding activities (s. 29)- Helps define scope of non-compete obligations (s. 30)- Establishes basis for contribution and indemnity- Generally useful for informing parties the expectations and defining thescope of obligations

MembershipDefault Rules-- All must consent to admission (s. 24.7) and expulsion (s. 25)-- Retirement of partner dissolves partnership (ss. 26, 32)-- Entitlement of departing partner to payout of capital and share of profits onretirement or expulsion (s. 42(1)): Share of profits or 5% based on share ofcapital at option of departing partner if not paid. Ex: partner leaves, normallythey get their capital investment back. They get a portion of the profits. But iftheyre not paid, they can choose to get their share of profits until paid back,or 5% of capital over time.

Issues-- Lesser degree of consent: hard to get people leaving to agree sometimes-- Criteria for admission: how to become a partner, articulated in some way-- Expulsion or retirement should not dissolve-- Process for expulsion including payout: typically, may be some kind ofdeferral of payment obligations. In small firms, with one person leaving, itmay be quite onerous for them to pay that person in full at the time of theirdeparture.

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CapitalizationDefault rules-- All share equally (s. 24.1): generally all partners dont contribute the sameamount of money.

-- No interest (s. 24.4)-- Return on excess contributions = 5% (s. 24.3)-- Almost all of these rules are typically changed

Issues-- Change entitlement-- Initial and subsequent contributions: might want rules for the requirement ofthe partners to contribute for things like expansion, renovation, etc. Ex: mayhave to contribute a proportion equal to the proportion of capital they own.-- Process for return on various events: retirement, expulsion-- Returns on excess contributions

-- so you may need to define capital, contributions etc.

ProfitsDefault rule-- All share equally (s. 24.1)

Issues-- Change entitlement: Criteria to determine entitlement ex: hours billable,non-billed work, etc. Firms often annually review for allocation of profits,decide on what should be the allocation based on this for each partner.Partnership draw: draw against your partnership entitlement, and then when

there is a determination of profits, there is an adjustment that you would hopeis larger than the money you have drawn.-- Process for reviewing application of criteria periodically-- Process for paying draws to partners

ManagementDefault rules- All may participate (s. 24.5) and have access to partnership books (s. 24.9)- Decisions on ordinary matters by majority of partners in number (s. 24.8)- Changes to nature of business require unanimous consent (s. 24.8)

Issues- Delegation and allocation of power- Arrangements for collective action no rules in the Partnership Act for this.Might want to set out when you meet, how many times, what a meetingconsists of, voting at the meetings, etc. The larger the partnership the morerules you need in this regard.- Risk management: authorization and control procedures dealing with thingslike negligence. None of the rules impact the third partys ability to make a

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claim against the firm, but they are intended to prevent those claims frombeing made in the first place. Ex: have internal review process beforepartners give some legal opinion. Benefit of having it in partnershipagreement is that it makes it legally binding downside is that it makes itrigid, hard to change, maybe more formal than you want in your partnership.

- As the firm gets bigger, not everyone is going to be able to manage to thesame extent

Joint Ventures- Not a distinct form of business organization or relationship with precise legalmeaning. It is used to describe a functional relationship where two or morepeople combine their resources for some purpose- Key feature limited in time and purpose- In a joint venture, the relationship is governed by some kind of contractualobligation between the parties. The issue that arises for us in this scenario isthat we know what contract law says, but we want to know whether there are

any legal implications of this kind of arrangement beyond what is actuallyexpressed in the contract.- Contractual Joint Ventures do they have any legal consequences outsidethose provided for in contract?

CMHC v. Graham- Partnership-like liability attributed to joint venturer where-- Contribution of both parties of money, property, skill or knowledge tocommon undertaking-- Joint interest in subject matter-- Mutual control and management

-- Arrangement limited to one project-- Expectation of profit-- Mutual sharing of profit

CMHC v. GrahamF: CMHC entered contract with Bras dOr to build a bunch of houses. Gavethem specifications and other measurements for these houses, also consultedwith B when the houses were being built. Also provided financing for this tobe done. B builds the houses and undertakes to pay back the amount offinancing that CMHC has provided. As security for this, B gives CMHC amortgage giving them the right to seize the house in the even that B defaults.

G buys a house from B, and as part of the arrangement, pays some to B andthe balance of the purchase price by assuming a portion of the mortgage -$200k. Defects in the house, so G stops paying the mortgage. C sues G fordefault under the mortgage. G argues that he doesnt have to pya because heargues C and B are in joint venture they are both responsible to him for hisdamages in the house. He can offset his mortgage payment with the damageclaim. The consequence, assuming that they are in a joint venture is that BAND C are both responsible for the defects. Diagram is in the slides.

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R: They are not in a partnership, but they were in a joint venture. The legalconsequences for this are the same as if they were in a partnership.- Contractual Joint Ventures do they have any legal consequences outsidethose provided for in contract?- Partnership-like liability attributed to joint venturer where

-- Contribution of both parties of money, property, skill or knowledge tocommon undertaking: B contributing skill, labour, property and C iscontributing financing, specifications for the house, consultation duringbuilding, also approved purchasers-- Joint interest in subject matter: initial arrangement for financing is themortgage, where transfer of legal title to ppty dev to C, B retains equitableinterest. So shared interest in the real estate.-- Mutual control and management: same as the first factors C providedspecs, consulted, purchasers approval, B involvedi n building and sale-- Arrangement limited to one project: C has lots of activities, this is only oneof the things it does, B involved in lots of other projects

-- Expectation of profit: C seemed to not be actually profiting, at least not inconventional sense. They were getting repayment of the debt, a fixedamount. Didnt matter how B managed the cost, price sold, mortgage debtwas fixed. B was in a position where they could increase their profits based ongood job, higher sale price etc. Court satisfied that C had financial interestthrough the mortgage debt.-- Mutual sharing of profit-- This case is rarely followed why? If you have all these things, might meetthe definition of partnership in s.2. But this might be something important toargue in an exam! Maybe a scenario where it doesnt look like a partnership,but maybe you can argue a joint venture. Sounded a bit like hed want to put

this on the exam recall 1997 exam question in addition to talking aboutpartnership liability, might consider liability for joint venture.

Fiduciary Duty?- Do people who are in this kind of relationship owe each other a fiduciaryduty? A duty to act in the best interests of the best interest, to not put a jointventurers interest ahead of the total joint venture activity.- Yes - on facts in

Wonsch v. National BankF: W construction enters into K joint venture with D, to build Waterpark Place.

Ws main job was to build, D was going to manage it as a business sell units,find tenants, etc. While building, W runs up debt of about $1M from NB. Whas trouble paying the debt. NB concerned they wont get paid back. D,because they are in joint venture, is aware of the difficulties and the debt. Dgoes to NB: says they will buy the debt for $750K. W might not give themanything, going to become bankrupt, etc. NB takes the deal, assigns claim for$1M to D. D then sues W for the whole $1M. W argues that D isnt allowed to

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enforce this debt because D as a joint venturer owes fiduciary duty to otherjoint venturer, cant profit from their debt.R: Court finds fiduciary duty, says D cant enforce the $1M debt. The have aclaim for the $750K, but cant actually try to profit from taking advantage ofthe difficulty of your joint venture partner.

+: Subsequent cases havent followed this approach in applying generalprinciples of duty and law, when you have commercial parties not operatingunder disadvantage they should be able to look after themselves. Courtshouldnt be creating fid duties, except where one party is vulnerable toanother. This will be very rare in arms length commercial relationships. Sothis argument has generally not been successful due to absence ofvulnerability.

- But not in all joint ventures finding that one party vulnerable to the othermust be made(Visagie v. TVX Gold Inc.)

- Duty not to disclose confidential informationInternational Corona v. Lac MineralsF: Parties negotiating that fell apart, IC smaller, Lac bigger, IC gave info to Lacthat was eventually exploited for profit by Lac. IC argued that theycommunicated the info in confidence.R: This expectation should be protected by law, requirement to compensate ICfor profits made by exploiting the information.

Extra legal consequences that may arise outside contract in joint venturerelationship1) use CMHC

2) establish a fiduciary duty3) confidential info between, recipient of info is expected to maintain confiden

Limited PartnershipsGeneral Description (s. 2(2)) Limited Partnership Act: At least onegeneral partner and one limited partner. A general partner is what we havebeen talking about all along, limited partner has liability that is limited to theextent of their contribution. This is different from the limited liabilitysometimes talked about in association with shareholders. Limited partnersonly liable up to the ceiling that they have agreed to contribute. This might becalled true limited liability, as opposed to the looser limited liability of

shareholders in a corporation.

How Formed file declaration in accordance with Limited Partnerships Act (s.3): in a general partnership, just need relationship under s.2 meaning. Setsout name of partnership and the identity of the partners. You have to renew itevery 5 years.

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Why have a limited partnership? Business proposed, general partner willing totake on the risk but they need to raise money. This is just one form ofbusiness they could use. Go to a bunch of people, get them to makecontributions as limited partners. Why do this instead of a corporation? Themain reason is that usually for tax reasons, people will be interested in

investing in this business as limited partners. The tax motivation: business islikely at least early on to have losses and limited partners will be able todeduct those losses against their income. It is generally a vehicle for someonewho wants partnership treatment from the profits/losses of the business, andgenerally the limited partners are passive investors that arent reallyinvolved in the business.

LiabilityGeneral Partner - unlimited (s. 8)Limited Partners - limited to extent of contribution (s. 9)Limit is lost if

(a) "takes part in the control of the business" (s. 13(1)); or(b) allows name to be used in firm name (s. 6(2)) kind of like holding out inPartnerships ActBUT can "advise as to [firm's] management" (s. 12(2)(a))How do you distinguish between advising and controlling? Hard to distinguish Houghton Graphics and Nordile Holdings. Made more complicated by typicalbusiness structures in limited partnership context.

Houghton GraphicsF: Diagram on slides. Setting up limited partnership, need limited and generalpartner. General partner is going to be a corporation. The corporation is a

separate legal entity. Conceptually, in many ways it is just like a separatelegal person. As a general partner, it has unlimited liability for any obligationsin the limited partnership. So you can only go after the assets of the generalpartner and corps generally have few assets. Dont need houses, cars, etc.Practically speaking, this is a device to protect a business against the claims ofcreditors people commonly insert a corp as a general partner for this reason.Z set the corp up in this situation, has control over the corp as a majorshareholder. So he is not responsible for obligations of the limitedpartnership. The corp can only act through natural people acts through Z asa shareholder he elects himself as director and officer of the corp. Throughthat capacity, conducts limited partnership business, including entering into

obligations with H. Finally, Z is a limited partner personally, and has agreed toinvest the amount for that role as well. Why would he want to do this? Zmight want to be one so he participates in the distribution of profits, or getslosses, from the business. The amazing three headed limited partner. Zenters into k with H using the limited partnership, and there is a default. Hsues the limited partnership doesnt have many assets looks to corp, notmany assets, looks to Z. So wants to argue that Z has taken part in the

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control (s.13(1)) of the business and loses his limited liability. Z argues that heis only acting on behalf of corp general partner, not personally.R: Z is the person who is doing this, asking the court to adopt an abstract lookat the way he has set things up to let him off the hook. A regular personwould say Z is doing all these things, not simply a case of someone giving

advice. But the corp has to act through somebody why should it triggerpersonal liability through that person, Z? Court not satisfied that Z should beable to claim hes only a limited partner, he is in control of the business.+: Nordial Holdings is a similar case essentially facts were same except theperson like Z was not a substantial shareholder. The court adopted a moreformalistic approach, said the person should not have liability beyond theirliability as a limited partner.

Rights of Limited Partners- share in profits and have their investment returned (ss. 11, 15)- inspect books and make copies (s. 12(2));

- get full and true information regarding the limited partnership (s. 10); and- to obtain dissolution by court order (s. 10): rules of Partnerships Act apply togeneral partnerships except to the extent that they conflict with the rules setout in Limited Partnership Act-- Transfer of Limited Partnership Interest (s. 18): the transferee is not asubstituted limited partner ie; doesnt have all the rights of a limited partnerunless it is approved by all the partners or is done in accordance with thepartnership agreement. Recall partnerships: cant replace yourself withsomeone unless everyone agrees, or there is a provision in partnershipagreement allowing for that. Generally there is one, agreements have thisability, people want to be able to sell their investment easily, dont want to

have to find all the partners to get their agreement instead agreementprovides consent to a process for the transfer of limited partnership interest.

Dissolution (ss.15(4), 21, 23) of Limited Partnership- Death, retirement, mental incompetence or dissolution ofgeneral partnerUNLESS there are other general partners, right to continue in partnershipagreement and all partners agree that continues: defining characteristicceases to exist- All limited partners cease to be limited partners: another definingcharacteristic ceases to exist. But they might continue as a regularpartnership.

- Limited partners contribution is not returned when required to be under LPAct or limited partnership insolvent- Dissolution under Partnership Act (PA. ss. 35, s. 46): can apply to court fordissolution. S.46 sets out hierarchy of the way the legislation will apply.

Other Points for Limited Partnerships- Person can be both a general and limited partner (s. 5(1)): might do this ifthey want to participate in the profits/losses as a limited partner. But they still

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have the same liability. It can only be the financial interest as a limitedpartner that can be of interest.- Limited partner can lend money to general partnership, create adebtor/creditor relationship (section?)- General partner can be and typically is a corporation

- Often attractive so limited partner can deduct tax losses against otherincome (p.65-66)

- No class on Monday, October 17- Make-up: Friday, October 28, 4:30Read - VanDuzer pages 90-98

September 28

Constitutional Issues - CorporationsJurisdiction to Incorporate

Provinces-- Power to incorporate corporations with provincial objects (Constitution Acts. 92(11)). What are provincial objects?-- Can create corporations with capacitybut not the rightto carry on businessin other provinces (Bonanza Creek). The right has to be accorded by thelegislature that has authority in that jurisdiction. The capacity is subject onlyto the recognition of those jurisdictions of that right. In ON: ExtraprovincialLicensing Act aids in this recognition also says ON will grant the automaticright of any corp in another Canadian juris to carry on business in ON.-- Right given by other provinces in provincial licensing statutes

Canada-- Power to incorporate found in POGG (Parsons)-- Federal corporations have the power and the rightto carry on business ineach province. They are not subject to provincial licensing requirements. Butthey dont need to actually carry on business in more than one province.-- If you have a client who wants to carry on business across the country,might think fed is better because it would give them the right to do so, andthey also wont be required to license under provincial statutes. BUT licensesare virtually never declined so its not really a barrier to carrying on businessin another Canadian juris, although if the name you want to use is already inuse in the prov, or confusingly similar, that can be a problem. You can avoid

this problem if you incorporate federally but there may be trademarks,domain name issues. So the corporate law problem goes away but it doesntnecessarily get rid of legal problem.-- The key difference between federal and provincial incorporation-- Limited practical effect- But when you start carrying on business in a province, you still have to file aninformation filing

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Jurisdiction to RegulateProvinces- Cannot directly legislate solely in relation to status or powers of federalcorporations. Cant control their shareholding scheme, say they cant have aparticular name, etc. No requirement of ON to recognize limited liability of

corps from other provs, but they would due to their desire to have reciprocitywhen their corps go to that prov.- Can legislate in relation to the way federal corporations exercise their powersif-- Legislation primarily in relation to a head of jurisdiction in section 92 (like,for example, property and civil rights which is most common), AND-- Not inconsistent with federal legislation: otherwise paramountcy applies(e.g.

A.G. Man v. A.G. Can.F: prov legislation required fed corps carrying on biz in the province to have

certain kinds of provisions in their constitutional documents. The idea was toprotect investors in Manitoba. Justified it with s.92, property and civil rights of the people of Manitoba.R: Inconsistent with fed legislation says you dont have to have thesecharacteristics in your articles. The prov legislation is not effective.

Lymburn v. MaylandF: ON govt, to protect investors, said you cant issue securities shares to ONinvestors unless you give a certain amount of disclosure. S.92 property andcivil rights. Imposed a procedural requirement on fed corps to providedisclosure had to follow the process when issuing shares, to ensure informed

decision making.R: This was acceptable, not found to be against fed legislation.

- Can legislate solely in relation to head of jurisdiction in section 92 - even ifeffect is to sterilize federal corporation

Canadian Indemnity v. AGBCF: BC wanted to set up prov auto insurer. To create prov corp, and all autoinsurance required to be obtained from this insurer, excluding insurancecompanies from the market. Done solely from s.92, property and civil rights toprotect people who insure their cars in BC. Not related to federal corps per se,

but had effect of excluding the insurance companies.R: Doing this within their jurisdiction under s.92 irrelevant that they areunable to do business.

Canada-- Cannot legislate directly in relation to status or powers of provincialcorporations

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-- Can directly affect how exercise if legislation primarily in relation to area ofjurisdiction under section 91-- Has not arisen much most regulation of business is provincial: things liketelecommunications, banking, federally incorporated insurance companies areexclusions though.

Dual incorporation- need to know that people can incorporate in either the provs or feds, and willbe impacted by both juris in different ways depending on how incorporated- once you incorporate under a particular juris and have an issue, you have tolook to that legislation. Any other corporate law is completely irrelevant. Ifthere is something helpful under the fed statute, that doesnt matter now.Same with things in statutes in other provs when you incorp federally.- so you need to be aware of the two corporate statutes, what their differencesare, the costs and benefits of incorporating under one or the other

Incorporation and Organization of CorporationsTo Incorporate OBCA Rules- File the Articles of Incorporation Form 1: define the characteristics of thecorp, the shares and the characteristics of them, the directors, board etc.- Name Search Report: in assignment: needs to go in with the articles. Theidea is that by requiring one, they are requiring people to have a look to makesure the name they have chosen in available and not used by somebody else,not confusingly similar to a name used by somebody else.- Fee $360 - $300 if done on-line: plus service provider fee, in ON-- Under CBCA is $250 - $200 if done on-line- Must also have consent of directors not signing articles though need not be

filed. You need to maintain a record of it at least to ensure you dont namepeople who dont actually want to be directors.

To Organize- Directors Meeting: preferably done right away to do a couple things:-- Issue shares: secured the governance of the corp into perpetuity. If noshareholders, no one who can do anything on behalf of the corp is somethinghappens to the directors. Even one share to one person means there issomebody who can elect new directors. If shareholder(s) dies, it passes tosomeone else depending on their will/intestacy. So issuing shares createspersonal property that continues to exist indefinitely at least until the corp

itself dissolves.-- General By-law: procedural rules about things like shareholders meetings,how the voting works, whats the quorum, what the roles of the officers are,etc. An important complement to the default rules in the corp statute dealingwith these organizational issues. Like partnership agreements, might changedefault rules to meet needs of people in the corp.-- Appoint Officers: CEO, President, Secretary etc. and make delegate to themsome powers to do things in the corp. s.102 CBCA: directors have the power

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to manage, supervise the management of the business and affairs of corp.They have plenary power to do everything. But practically speaking, not thedirectors that want to make all the decisions about hiring/firing, leasing,buying supplies etc. So the board of directors delegate these roles through ameeting, pass to other people.

-- Banking Arrangements: every corp/business needs a bank account. But fora corp, the bank si going to look for documentation that the corp has properlyauthorized the account, and who the people are that are going to use theaccount.

- Shareholders Meeting-- Approve By-law: nature of by-law is that it has to be presented toshareholders for approval.-- Elect new directors: only where directors listed in articles are not permanentdirectors you want.

- Shareholders Agreement-- With small numbers of shareholders, they often want to tailor thegovernance relations between them.-- Might want to have votes correspond to shares owned but maybe theywant to have agreement that unanimous consent is required for shareholderapproval. Can put this in the shareholders agreement.-- Might also have limits on how shareholders can transfer shares; ie: right offirst refusal.

As a lawyer, you need to look at the following things in advising a corporateclient:

- governing statute- articles- by laws- resolutions passed by shareholders- shareholders agreement

Function of Corporate Law- Why do we have corporate law?- The main goal: Encourages people to invest money in businesses. Peopleprimarily tend to invest based on what the return on the investment isexpected to be people more likely to invest if they expect a lower return.

The return may be dividends, or that you expect the share to go up and sell itlater. The things that the law can do to increase returns is going to have apositive impact.- As a rational investor, youd be unlikely to want to invest in something risky.But might be willing to take a risk if the potential returns are larger.

-- Increase Returns for Shareholders

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Lowers transactions costs with default rules: corp law provides framework forgovernance in the corporation. To the extent these rules are a good fit, dontneed to make new ones, saves some costs.Low cost limited liability: shareholders protected from claims of creditors ofthe corp business. Shareholders not responsible. Corp law does this,

otherwise individuals would be liable. Dont need to take small amounts ofassets, purchase lots of insurance, contract out of every risk you face. Alsocant contract all the time, sometimes you impact people with whom you donthave a contractual relationship.

-- Decrease Shareholder Risk- Limited Liability: any creditors of business being carried on only have accessto assets that the business has. Creditor is basically limited to pool of assetsthat the corporation has.- Mandatory rules protecting all shareholders: SH concerned about whatmanagement is doing. This only arises when corps reach certain scale where

everyone has different roles, SH not the managers as well. When separationbetween SH and management, practical issue is how the SH are protectedagainst things mgmt might do. Ex: mgmt wants to pay excessive salaries,shirk duties, negligent. These rules protect the SH including fiduciary duty,s.134 OBCA: officers have to act with the best view of corp also standard ofcare in s.134. Behavioural standards applying for the benefit of SH.- Mandatory rules protecting minority shareholders: often person with mostshares has most votes. So the directors are kind of at the mercy of themajority SH. How do minority SH ensure their interests are protected againstmajority SH and directors making deals? Oppression remedy: minority SH canapply for relief, quickly, if mgmt operates in a manner that is oppressive of

minority SH. This encourages investment of minority SH, in some ways acorresponding detriment to be a majority SH this is a balance struck in thecorp statute.-- Also imposes balancing mandatory rules protecting non-shareholderstakeholders: ways that other people not directly dealing with the corp areprotected. Limited liability can have a negative effect on creditors, since theycan only claim against the corp. So corp law is a sort of intervention in themarketplace, to favour SH.

Balancing Rules Protecting Non-Shareholder Stakeholders- Limits on Limited Liability

-- Judicial Disregard of Separate Legal Personality-- Personal Liability of Directors and Officers ifalso shareholders- For Torts: when acting on behalf of the corp- Unpaid Wages (s. 131-s.119 CBCA)- Income Tax Withholdings (s.227.1 ITA): directors have to take adequate carethat this does not happen, otherwise liable- Liability for Breach of Duty to the Corporation (s. 134-s.122 CBCA): basicstandards of behaviour primarily designed for the protection of the corp.

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Because they protect the corp, have incidental benefit for anybody with aninterest in the corp.- Regulatory Offences: if they had a hand in dumping toxic material into astream, for example- Oppression (s. 248): non-shareholder stakeholders have been successful

arguing this, such as creditors. Say that the conduct of the corp has beenoppressive to them, deprived creditor of their ability to recover.+ Once again, note that all of these reduce the practical benefit of limitedliability. This is not to say that these are not good reasons for doing this,though.- This does not disregard the corporation for the benefit or any other creditoror anybody else it is only a decision by a judge in a single particular case toallow a creditor to pursue directly against the shareholder.

Disregard of Separate Corporate Legal Personality- diagram on slides. Corporation owes money to all of the other parties. The

financial creditors, trade creditors, employees can go directly aftershareholders. This is normally something creditor asks for in specific litigationbecause it is not going to get obtain sufficient compensation from thecorporation.- When will the courts do this? No good set of rules or answer for this. It isgenerally rare. Partly because there is no legislative authority for them to doit, they have made it up entirely on their own. Statute clearly says liability forcorp cannot be pursued against shareholders.- But courts will generally use it in circumstances where the corp form is beingabused. Most common: fraud.

Other Rules Protecting Non-Shareholder Stakeholders- Corporate Name - Inc., Ltd. etc. (s. 10 in both Accts): you have to indicatethat you are a corp, a separate legal person. Need a legal suffix to indicateyour are a corp entity. Which one you choose is entirely up to you. You alsohave to use this on legally significant documents, like contracts. This can be asignal to a bank, for example, to want to look at the assets of the corp, wonderhow they are going to get paid, etc. because they know that the only entitythey will have access to if there is a default is the corp itself.- Restrictions on Share Issuance (s. 23): shares cant be issued on credit.- Restrictions on Use of Corporate Funds (s. 130): there used to be rules thatrequired a minimum amount of investment by shareholders so thered be at

least some money to cover claims that may come up. Canada doesnt do this why? Once the money goes into the corp, no guarantee that its going to staythere, likely will be put toward a business purpose. No real protectiontherefore in requiring a certain amount of money go into the corp at thebeginning. Instead, we have provisions that say once money does go in, thereare restrictions about what you can do with it ex: you cant redistribute toshareholders and in the process prejudice against creditors who have claimsagainst the corp.

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money to invest exchange it for securities. The businesses want to use thatmoney for some business purpose.Two goals of regulation:-- Investor protection against fraud and unfair practices (like insider tradingwhere parties have relevant information from inside the corp that will impact

the price of the stock). To encourage confidence of the public in the market.-- Efficientfunctioning of securities markets: want to get the money from thesavers to the businesses. The market is the exchange point, and we want tomake sure it is not costly for businesses to issue securities to people, can bedone quickly, with minimum administrative problems.- Tension between the two: efficiency of the market may be impaired if thereare lots of provisions against fraud.

Four main aspects of Securities Law(1) Disclosure by issuers regarding securities and business. issuers are anykind of thing issuing securities could be limited partnership, corporation,

trust, or other kind of business organization. Issuer must disclose on initialissue and on timely and regular basis thereafter, ie; when new things developin the business.(2) Regulation of securities market participants: professional participants inthe marketplace, like stockbrokers ie; BMO(3) Insider trading (wont tal

biz org - notes

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