Bizzzz Azzzzz 2013 Gillen by Cassidy

Business Association Basics A business involves the provision of goods and services—which may or may not be for profit Usually people must get funds which are used to acquire assets in order to carry on the provision of goods and

services These types of activities require some type of organization to be carried out To associate is to join or cause to join, to spend time with or to have frequent dealings with. Therefore a Business Association refers to people who associate in order to carry on a business, that is provide

goods or services.

The People Involved in a Business Association: Stakeholders The people involved in a business association are generally referred to as the “stakeholders”. The Stakeholders

include:1. Equity Investors: Provides funds in order to acquire the assests. Usually have a right to share in the profits,

which is a “residual interest” because profit is the residual left over after all other expenses including creditor interest is paid.

2. Creditors: Provide funds or goods/services on credit, often with a right to be paid interest. They have a fixed claim, which is the amount they invoice for, as the exact amount of their interest is known.

3. Managers: The people who run or oversee others in running the day to day affairs of the business. They may be equity investors or they may not be.

4. Employees: Those hired by the business to carry out specific day to day tasks. 5. Customers: The people who buy or take part in the goods or services provided by the business. 6. Suppliers: Those who supply the business with goods or services required: they may also be creditors if they

supply their goods or services on credit. 7. Competitors: Those who run a different business that competes with the business. 8. Local Community: The people that are immediately affected by the activities of the business in their community. 9. Broader Community: Society at large.

Forms of Association

Sole Proprietorship

Partnership Limited Partnership Limited Liability Partnership

Equity Investors Single equity investor who is called a “sole proprietor”

More than one, each called a “partner”.

More than one, each called a partner. Have “limited partners” and at least one general partner.

More than one, each called a partner.

Creditors Usually have creditor, who may impose contraints

Normally will have creditors who may impose contraints

Agents/Employees May hire agents or employees.

May have agents or employees. Partners are agents for each other.

Management Done by SP, or SP at least oversees the management

Typically each partner has a say, but not always. Partners at a minimum oversee the management.

There are restrictions on limited partners involvement in management.

Typically each partner has a say, but not always. Partners at a minimum oversee the management.

Assests Owned by SP Owned by partners personally. If one owns an asset for the partnership they hold it in trust for the other partners.

Liability SP personally liable for breach of K or for any torts, as it is the SP who personally contracts etc.

Partners personally liable for their actions as well as the actions of other partners… breach of K, torts etc.

limited partners are only liable for the amount they invested or promised to invest in the business. General partner does not have limited liability (but this can be a corporation)

Partners are not liable for the acts of their fellow partners or employees unless they were directly supervising the activity that caused the loss. Basically protects against negligence of the fellow partners or employees. However if creditor sues, they are all still liable.

Separate Entity? No.Continued Existence

Ends on death of SP

Ends on death or bankruptcy of any one of the partners.

Notes Can’t have a non-profit Partnership b/c the act defines it as “carrying on business…with a view of profit”

Corporation Limited Liability Company

Unlimited Liability Company

Business Trust

Equity Investors One or more, called ‘shareholders’. Each SH can have or more shares, that consist of bundles of legal rights that can be asserted against the corporation. Profits paid to shareholders as ‘dividends’.

Must be American, as this is only available in the USA. Restriction on the transfer of shares.

Basically used by American’s since it provides them tax advantages (flow through taxation). Only in BC, AB and NS

EI is called a “settlor” who puts title to property in the hands of trustees who hold it for the benefit of the beneficiaries (beneficiaries are also the settlors). Trust instrument can divide interests into ‘units’ which are much like shares.

Creditors Corporation itself can have creditorsAgents/Employees Corporation must have agents or the agents must hire

employees to act for it since it is imaginary. The directors of a corp are referred to as the “directing mind” of the corp.

Trustees may hire agents or employees if the trust instrument says they can.

Management SHs can be directly involved. Basic framework: SHs elect board of directors (votes are attached to shares, one share may have no votes or many votes depending. Directors may or may not be SHs), the board appoints officers, officers either manage day to day or delegate to other people they hire.

Unit holders can elect trustees each year, they manage the business.

Assests Owned by the corp itself Title to assests is in the hands of the trustees, they have fiduciary duty to hold them in the best interest of the beneficiaries.

Liability SHs are only liable for the amount they invested as creditors can only go after the assests of the corp. As liability is the same as a Limited Partner, the benefit here is that SHs can be involved in management.

SHs are personally liable—jointly and severally for the debts and liabilities of the company.

Trustees are carrying on the business so they are liable. Beneficiaries may be liable if there is the implied right of indemnification (trust instrument can do away with this) or if the trustee is seen as their agent, but in order for that to happen the beneficiaries need to have a certain amount of control and merely electing the trustees is not enough.

Separate Entity? Yes No.Continued Existence

Potential Perpetual Existence.

Must have a limited term of existence

Potential Perpetual Existence

Co-operative Assocation

Society or Not for Profit Corporation

Unincorporated Association

Mutual Organization

Equity Investors Corporate form so everything the same as above, but have members instead of shareholders. Profit returned as lower prices/ reduced fees/ benefits rather than dividends.

Registered under different statute, but mostly the same as corporations—called members not shareholders. Voting by members to amend articles, by-laws etc. Members may be the people that receive benefit from the not-profit or they may not be.

More than one person acting together not-for-profit, but have not taken the specific steps to form a corporation

Usually set up as a non-profit corporation—although could also be a trust, unincorp association. Have ‘members’ pay fees to provide capital… in return get the services of the mutual organization (not profits)

Creditors Can have… will be creditors to the members individually

Depends how it is organized… if corp, then see that… if trust… then see that etc.Agents/Employees Can have… members

may be considered agents for each other

Management Generally whoever the members are… no formal structure.

Assests Owned by members individually

Liability The members may be personally liable

Separate Entity? NoContinued ExistenceNotes Must carry on

business on a ‘co-operative basis’ which means non-discriminatory as to who can use the services, each member has one vote, members contribute to the capital etc.

Often used to carry on charitable activities BUT they don’t have too… are not synonymous. Also charities don’t have to be not-for-profit either.

Basically like a partnership, except working NOT for profit and no formal steps taken to register as a corporation/ society.

Example: Stock exchanges, banks, insurance

NOT THE SAME THING AS A MUTUAL FUND

Multiple Contracts Social Enterprise Joint Venture FranchiseNotes

Can use a series of separate contracts to carry on a business

At some point it becomes too complicated to monitor and enforce so many contracts, so makes sense to formally associate in one of the other ways discussed.

Carried on for a combination of profit and non-profit social, cultural or environmental objectives

Amendments to the BCBA on july 2013, provide for a “community contribution company”

More flexible b/c then not worrying about losing your non-profit status

No precise legal meaning

Not a separate legal entity

Agreement to set it up could be partnership, could be contractual, could be corporations working together…

Licence to use the name, trade-mark, know-how etc. by the franchisor to the franchisee

Usually involves a contract

Governed by provincial law

The franchisee and the franchisor could be a sole proprietor, partnership or corp… but almost always a corp.

Accounting BasicsBalance Sheet Top-down or left-right format: shows the assets on the

left/top and the liabilities/equity on the right/bottom. The two sides should balance if what is done with all the money is accounted for.

Income Statement Revenues of the business less the expenses. Can separate out special expenses like the cost of wholesale product to show gross profit (i.e. in retail) before accounting for the day to day expenses and showing net profit.

Statement of Retained EarningsStatement of Changes in Financial PositionAssets Things that are acquired for the business and will have a

continuing value for at least one year.Liabilities Fixed obligations, usually debt from creditors or goods or

services that are obtained on credit.Equity Funds advanced as an investment, i.e. equity, and

represent residual obligations… a right to share in the residual amount (or the profit left after all the fixed obligations are taken care of).

Trade Credit Goods or services obtained on creditAccounts Payable Trade credit listed under the liabilities section… so when

the business has been loaned trade credit.Accounts Receivable Trade credit listed under the assets section… so when the

business has leant others trade credit.

AgencyA person who has the capacity to affect the legal relations of another person who is referred to as the principal. This is primarily through contract, but may also be through tort.

Issue Rule NotesIs there an agency relationship?

An agent is a person who can affect the legal relations of another person, referred to as the principal.

Unless the fact pattern explicitly states, briefly say why/how they affect the legal relations of the alleged principal to make them an agent.

If not an agent, the problem is at an end. If they are an agent, the agent’s actions may bind the principal if…Did the agent Act within their authority?

There are two types of authority an agent may have, actual authority or ostensible authority.

Did the Agent have actual authority?

Actual authority can be express or implied and does not require consideration.

Did the Agent have express actual authority?

Express actual authority is stated by the principal either orally or in writing, or is inferred from the principal’s oral statement or writing.

Did the Agent have implied actual authority?

Implied actual authority is determined from the usual or customary authority of such agents. Usual authority is authority an agent has used in the past, that is outside of the express authority and the principal has allowed. Usual authority is specific to the relationship between this agent and this principal and what has occurred in the past. Customary authority on the other hand is based on what agents of this type are generally allowed to do.

Implied actual authority CANNOT be found where it is inconsistent with the express actual authority or with the specific circumstances between this agent and principal.

If the agent acted outside of his/her authority, then they are personally liable to the principal and possibly to third parties (see third party section). If they acted within their authority, the principal is then bound to any 3 rd party for the agent’s actions. However even if they acted outside their authority, the principal may still be bound to 3 rd parties (see third party section).

The agent owes the principal duties when acting within their actual authority…Did the agent perform their obligations?

An agent has a duty to perform the tasks that they were given by the principal (as set out in the agreement) and in the way the principal instructed.

Liable to principle for losses if they do not.

Did the agent breach their fiduciary duties?

An agent is said to owe implied fiduciary duties to their principal.

The express agreement can vary these duties, so watch out! They are just implied!

(a) Act with reasonable care

The agent must perform their duties with reasonable care.

Remedy: damages

(b) The duty of loyalty

The first fiduciary duty that an agent is said to owe their principal is the duty of loyalty. There are two specific aspects of this duty: first the agent must not put themselves in a position where their own interests conflict with the principals; second an agent must not make secret profits from their relationship with the principal.

conflict of interest occurs when the agent buys the principals goods themselves or sells their own goods to the principal.secret profits would be when an agent sells the principals goods for a higher price and keeps the difference, or if an agent takes a fee for choosing a particular supplier, or if an agent acts for a competing principal.

If the agent breaches the duty of loyalty through a conflict of interest, the transaction is

considered void and the agent must account to the principal for any profits the agent made—or damages for any losses the principal suffered. An injunction may also be available against further conflicts of interest.If the agent makes secret profits, they must account for those profits to the principal and pay them to the principal.

(c) The duty not to delegate

The agent has a duty to perform their tasks themselves and not to delegate their assigned tasks to anybody else. However an agent can clearly have express authority to do so, or implied authority if the circumstances clearly warrant.

Example: If you are on a ship and you need repairs and you stop into port in a country where you don’t speak the language, delegating your authority to a native speaker would be implied authority to delegate.

The remedy for a breach of the duty not to delegate would be damages for any loss suffered by the principal as a result and/or an injunction against further delegation.

(d) Duty to keep proper accounts

The Agent must maintain proper accounts of their transactions for the principal.

If they do not, there is an evidentiary presumption against the agent which means the court will find the losses or profits the agent is liable to the principal for to be that which is most favourable to the principal.

The principal owes the agent duties when the agent acts within their actual authority…Was the principal required to pay the agent?

As an agency relationship can be gratuitous, usually an obligation of the principal to pay the agent must come from the express agreement. Additionally the agent must have performed the duties assigned under the agreement and commission may only be available if the agent was the effective source of the sale or K etc.

However, if the circumstances are such that an agent would not have been likely to act gratuitously for the principal, then the court may award the agent remuneration on a quantum meruit basis (i.e. what an agent would normally be expected to be paid in those circumstances)

Is the principal required to reimburse the agent’s expenses and indemnify the agent against losses?

The principal must pay the exepenses of the agent and indemfy them against losses if: (a) the agent was acting within the scope of their actual authority and (b) the expenses were not incurred through a fault of the agent.

If the agent did not act within their actual authority, the third party might still have a remedy if:(1) Can sue the principal if:

The agent acted with ostensible authority.

There are two required elements for an agent to be considered to be acting with ‘ostensible authority’. The first is that the alleged principal must have made a representation or permitted a representation, either implied or express in words or conduct, that the alleged agent had authority to act on their behalf. Secondly, the third party must have reasonably relied upon this representation to their own detriment.

If the agent acted with ostensible authority, the principal will be bound by the agent’s actions such as forming a contract with a third party.

However, if this ostensible authority is outside the agent’s actual authority, the agent will be liable to indemnify the principal.

(2) Can sue the agent for:

Breach of warranty of authority

To successfully claim breach of warranty of authority, the third party must prove that: (1) the agent represented that they had authority (2) the representation was false and (3) the third party acted on the representation to their own detriment.

Damages collected for breach of warranty of authority are EXPECTATION (NOT reliance) which is what makes this different from the tort of negligent misrepresentation.

(3) Can continue with the K if:

The principal ratifies

Where the alleged agent was not acting within their actual or ostensible authority, the alleged principal can still ‘ratify’ the contract and create a binding agreement with the third party. In order

Consequences:o The ratification relates back to the

time of offer and acceptance between the agent and the 3rd

the agreement for ratification to be successful:(1) The alleged agent purported to act on

behalf of the alleged principal(2) The alleged principal was in existence and

ascertainable at the time the alleged agent purported to act on their behalf

(3) The alleged principal had the legal capacity to do the act both at the time the alleged agent acted and at the time of ratification.

(4) The alleged principal has knowledge of all the facts at the time of ratification.

If all three are present, the principal may ratify either expressly, by conduct or by acquiescence.

party (so that’s when the K started—any attempt by 3rd party to revoke acceptance afterwards will be ineffective)

o The principal and 3rd party are in a binding agreement and can sue each other

o The agent CANNOT be liable for breach of warranty of authority

o The agent is not liable to the principle for exceeding their authority

o The principal will be liable to the agent for reasonable remuneration and to indemnify the agent for expenses incurred in effecting the K.

If the principal was undisclosed…The principal CAN’T reveal themselves and sue the third party if:

(1) The terms of K require that only the agent perform the termsOR

(2) The circumstances indicate the 3rd party clearly intended to K with the agent specifically (so something about the agent personally, or would not have K’d with the principal if their identity were known)

**must be some corroborating or specific circumstances that indicate the 3rd party would not have contracted with the principal… i.e. prohibited by statute or past dealings**

If the 3rd party finds out:

(1) The 3rd party can sue the principal(2) Can still sue the agent as party to the K(3) The 3rd party can set off any rights or use

defences that they would have against the agent, against the principal.

“set off” rights means… subtract something that they already paid the agent (i.e. partial payment for goods) against what the principal is claiming from them, which would be the full payment.

If the agent committed a tort…The principal will be liable if:

If the agent committed a tort while acting within the scope of their authority, the principle will be liable for that tort. The principal does not have to authorize the specific wrongdoing nor do they have to have benefited from the tort. Rather, the agent must have committed the tort while doing the ‘class’ or type of acts that the principal authorized the agent to do.

**authority is either ostensible or actual**

Is the agency relationship at an end?Acts of the parties: The agency agreement may provide for

termination or either party may unilaterally terminate the relationship (effective immediately unless employment relationship which requires reasonable notice).

By operation of law: An agency relationship is terminated by law when either of the parties dies or becomes bankrupt. Additionally, frustration may terminate an agency relationship if the reason for the arrangement no longer exists or can no longer be performed such that is is ‘frustrated’.

Frustration: i.e. that case where they had a K to rent a dance hall, but then it burnt down… clearly can’t be bound.

Sole ProprietorshipIssue Sub-Issue Case/

SectionNotes

Legal Structure

General n/a The sole proprietor owns the assets of the business and is the ultimate decision maker. It is not a legally separate entity.

Consequences n/a The sole proprietor is personally liable for all liabilities of the business, as it is not a separate legal entity. This includes contracts or torts or debts. The sole proprietor’s personal assets are at risk should there be a judgment against them.

Formation General n/a There is no requirement to register a sole proprietorship business, all you have to do is simply start carrying on a business.

Name Registration

When s.88 PA If oneo Is in the business of trading manufacturing or miningo Is not in partnershipo The business same is not the sole proprietor’s own name OR the

business name consists of a phrase indicating plurality of personsYou have to file the name with the registrar

Trading/ manufacturing/ mining

n/a o No definition in the acto Not much jurisprudenceo Trading interpreted as including anything one does to earn a livingo Very broad, even ‘car rental’ constitutes trading

Refusal s. 89(1) PA

Registrar will not register a name that(a) is the name of a corporation registered, incorporated or

continued in BC or(b) is likely to confuse or mislead b/c it is so similar to a corporate

name or is a name that the registrar disproves ofs. 89(2) PA

UNLESS:(a) the corporation consents in writing or(b) the business name was used before the corporation first used

its name.What happens s. 90 PA Registrar maintains a list showing the business names on the left side

with the names of the persons associated with that business on the right.

Purposes Identify the sole proprietoro Credit checkso Starting an action **note not necessary b/c Rule 20-1 of the

Rules of Court allows for the sole proprietor to be sued in the name of the business, and service effected by leaving a true copy of the relevant doc at the place of business with a person who appears to manage or control the business**

Avoid Deceptiono If the name indicates a plurality of persons but there is just oneo Passing off as a different business or corporation, can also check

registry first before you pick your name to avoid this problemFunding Generally n/a The main sources of funding are:

(1) Sole proprietor makes an equity investment(2) Borrowed funds i.e. a bank(3) Trade Credit

Bank Loan n/a o Contractual arrangments

o Contain provisions to provide protection to the bank against non-payment, i.e. ‘security interest’ on one or more assets of the sole proprietor (either personal or business)

o May require SP to maintain certain ratios i.e. “working capital ratio” that adds up the assests that can be turned into cash divided by the liabilities that have to be met in the near term. If ratios not maintained bank has rights… acceleration clause lets them call the entire amount in immediately, or could seize the security

o Business loan: pay interest at regular intervals, and then the entire principal at the end of the term (usually five to ten years)

o Short term loan: revolving line of credit—use funds as needed, interest only charged on what is withdrawn.

Securities Regs n/a Can apply to SPo Would not apply to eauity investmento Might apply if the SP borrows moneyo Bank loan is an exempt security, but if borrowed from other

persons securities regs might applyo Would have to follow them, unless you can rely on an

exemptiono Reliance on exemption usually the only option b/c they are hard

to comply withManagement Generally n/a Sole Proprietor has ultimate control

o May delegate some of their authority to employees or agentso Those people may in turn have the power to delegate, so

possibility for quite complex hierarchyo May be constraints imposed by lenders… used to minimize their

risk.Dissolution Generally n/a Simply stop carrying on the business

o Easy to decide where assets go b/c there is only one ownero Have to pay off liabilities, but after that SP keeps whatever is left

overWhy Choose? Non-tax n/a Very easy to form & Dissolve

o No formal processLimited Liability of Corp not a Reality

o Bank will make you give them a security on personal assets anyway, so it is irrelevant.

o Insurance may cover tort liability as wellTax n/a Flow Through Taxation

o Not a separate entity so SP not taxed as a separate tax payero Can offset losses against your personal income, with corp you

can only offset losses against the corps income.o Even though corp can carry losses over into the future, it is

always better to pay less tax now, because then theoretically you can invest the extra money and earn more.

Partnership

Originso Developed in the common law courts as well as courts of equityo Extension of contract and agency lawo Codified in England in 1890o This statute was basically adopted in BC in 1894o Parts I and II are basically unchanged from the 1894 acto The act preserves the rules of equity and common-law except where they conflict (s.91 PA)

UsesProfessionals

o Provincial legislation used to prevent professionals from carrying on business through corporations, so they would use partnerships

Joint Ventureso A good way to formally organize a joint venture… two corporations can carry on a partnership togethero “person” defined in Interpretation act as including corporation, therefore can be a ‘person’ carrying on a

business with another in the PATax Reasons

o Flow through taxation, can use losses against personal incomeDefault

o If you are carrying on a business for profit with someone and you do nothing to formalize the relationship, you are by default carrying on a partnership.

Why Chooseo Easy to formo Very flexible form of association unlike corporateo Partners are personally liable, but limited liability of corporation may not actually be real if lenders require

personal security to give you a loan (particularly w small partnership)o Flow through taxation, partnership not a separate entity and thus not taxed as a tax payer, but rather only taxed

once money is in the hands of the partners, can also offset losses against personal income.

Default ContractPartnership Act provides a default contract between partners, can be modified by express agreement

In GeneralIssue Sub-Issue Section/ Case NotesFormation n/a There are no formal steps required to create a general partnership.

Just must meet the definition in s. 2… see “existence” below.Corporations Internally s.3 PA Corporations themselves (i.e. internally) are not partnerships and the

relationships within the corporation are not governed by the PAAs a Whole s.2 PA

s.29 BCIAAs noted above, a corporation itself can be a partner with another corporation, individual or partnership.

Legal Status Generally Re thorne A partnership is not recognized as a separate legal entityConsequences Re Thorne A partner cannot therefore be an ‘employee’ of the partnership as it

requires two individuals for an employment relationship: may be important in the context of worker’s comp or Human Rights Codes.

s. 11 PA Each partner is jointly liable to the full extent of their personal assets for debts and liabilities of the partnership

s. 14 PA Jointly and severally liable for torts of one partnerPA A partner cannot be a creditor of the partnership unless special

circumstances occur.Actions Against a Partnership

Rule 20-1 BC rules of Court

Actions against a partnership may be commenced and defended in the partnership name

Re Thorne This does not mean the partnership is a separate legal entity, just a matter of convenience.

Registration Generally s. 81(1) PA Persons associated in a partnership for trading, manufacturing or mining must file a registration statement with the registrar.

Timing s. 82 PA Must file within 3 months of formation with the feeIndex s. 90 PA Registrar keeps an index that shows the name of the partnerships

registered and the names of the partners.Changes s. 83(1) PA Change or alteration in membership requires a new registration

statement to be filed.Failure Offence Act It is an offence to fail to file a registration statement, fine up to

$2000s.84 PA If a change in membership is not filed, then a

retiring partner will continue to be a partner and thus be liable with respect to debts after retirement.

***This is the effect of this section, not what it says

Funding Equity Investors n/a Partners are the equity investors, typically will share profits in proportion to their contribution BUT s.27(a) PA says they share equally SO YOU HAVE TO STIPULATE IF YOU WANT UNEQUAL SHARE OF PROFITS

Creditors n/a Can have bank loans or trade creditSecurity Regs n/a o A partnership interest may be considered a ‘security’ under

provincial securities legislation—might be subject to it.o Loans to partnership might also be considered securitieso If they are, a prospectus is required to sell themo Need exemption otherwise.

Retirement Solution: - What kind of notice was the party entitled to?- Did they receive it?- If not, they can treat retired partner as a partner if they are an “apparent”

partner.s. 39(1) PA Person dealing with the firm after retirement can treat all “apparent” members as

partners until they have had notice of the change in the partnership

Dominion Sugar “Apparent” partner = notoriety of the person as a partner in the community, or use of the person’s name in the sign or letterhead, or from person’s prior dealings. It is “apparent” to those dealing with the firm and not to the community in general.

s. 39(2) PA If person has not had prior dealing, it is sufficient to notify them of retirement via the Gazette, thus this implies that people who have had prior dealings must receive have something more than notice in the Gazette- confirmed by Tower Cabinet.

Tower Cabinet v Ingram

For persons with prior dealings, “actual” notice must be given—don’t want to require third parties to continually check the gazette every time they deal with partnership.

s. 39(3) However retired partner cannot be liable to anyone who is shown not to have known that they were a partner before retirement.

s. 84(b) If you fail to register a new registration statement, the retired partner continues to be considered a partner.

s. 19(3) However, could include in partnership agreement that when someone retires remaining partners and creditors relieve them from liability.

STEPS TO TAKE: Thus in keeping with the rules in s.39 and 84(b) a retiring partner should:(a) Provide actual notice to all those with whom the firm has had prior dealings(b) Put a notice of retirement in the Gazette(c) File a revised statement of registration that removes the name of the retiring

partnerIf you do this, then the onus shifts the persons dealing with the firm and they can’t claim you are an ‘apparent’ partner… have to make the claim some other way i.e. through the existence of partnership tests (esp business in common section).

Policy o Retirement provisions in PA appear to protect reasonable third party reliance on a retired partner, thus where reliance isn’t reasonable can argue that third party is not entitled to continue to treat retired partner as an “apparent” partner despite failure of notice

Dissolution Act of the Partners

s. 35(1)(a) PA Partners can set a fixed term for the partnerships. 35(1)(b) PA Partners can agree to dissolve after completion of a particular

venturess. 29 and 35(1)(c) PA

Give a unilateral notice of intention to dissolve.

s. 35(2) PA Where unilateral notice given to dissolve, it occurs as of the date mentioned in the notice, or if no date mentioned from the date of the communication of the notice.

Automatically Generally Dissolves automatically upon the death, bankruptcy or dissolution of a partner.

o Because relationship is one of trust and involves sharing of losses, so don’t want to continue if someone is no longer able to do that.

s. 36(1) PA On the death, bankruptcy or dissolution of a partner(a) A partnership of 2 partners is dissolved and(b) More than 2 partners is dissolved between the remaining

partners and the dead/bankrupt/dissolved one, unless they have agreed otherwise.

ExistenceIssue Case/

SectionNotes

Who seeks to confirm existence?

3rd party vs partner

n/a Answer to the question of existence may depend largely upon WHO is claiming there is a partnership. For example if a person is claiming they are a partner, it may be significant that they were never formally added to the agreement. However if it is a 3rd party, it will largely depend on what an objective observer would think considering all the circumstances, regardless of the existence of a formal contract etc.

Pooley The fact that people have written down in their agreement that they are not partners is not determinative.

Martin v Peyton

“mere words cannot blind us to realities” i.e. writing down you are not partners are not conclusive if in essence you are acting exactly as partners.

Requirements s. 2 PA Four key elements needed:1) Persons2) Carrying on business3) In common (most contentious area)4) With view of profit

(1) Person s.29 BCIA Corporation, partnership or party(2) Carrying on Business

s. 6 PA Note that the definition of Business in s. 6 of the PA DOES NOT APPLY to part 1 of the Act where this definition appears. Therefore the common meaning must be used.

Backman Involves:(i) Occupation of time, attention and labour(ii) The incurring of liabilities to other persons; AND(iii) The purpose of livelihood or profit

Don’t Need:o More than one transaction or long amount of timeo Meetingso Entered into new transactionso Made decisions

**Can be the passive receipt of rent for example**(3) In Common Backman Factors to consider:

o Did the parties hold themselves out to 3rd parties as partners?o Contribution of skill, knowledge or assets to common undertakingo Joint property interest in the subject mattero Sharing of profits and losseso Filing of income tax returns as partnershipo Financial statements and joint bank accountso Correspondence with 3rd parties

Cox v Hickman

Just b/c person isn’t involved in management of business, doesn’t mean they aren’t a partner… just a ‘dormant’ partner.

Common-Ownership of Property

s. 4(a) PA Common ownership of property does not in itself make the co-owners partners. Need more than just common-ownership to prove partnership, although could be a sign.

KEY b/c co-owners are not agents for each other and can deal with their interests separately w/o permission of the rest of the owners. UNLIKE partners.

Lepage v Kamex: Ownership in common and NOT partnership b/co Ability of co-owners to deal with

individual property interests = inconsistent w partnership

o Members treated their interests seperately for tax purposes

Sharing Gross Returns

s. 4(b) PA The sharing of gross returns does not in itself create a partnership, need something more than this alone. Gross returns = revenues before deduction of expenses, ex theatre company and playhouse sharing ticket revenue ≠ partnership.

Sharing Profits s. 4(c) PA The receipt by a person of a share of profits of the business is PROOF in the absence of evidence to the contrary that he or she is a partner.However payment that is contingent on or varying with the profits does not in itself make a person a partner. i.e. think salesperson pay based on profits, as a percentage or a certain amount depending on how well the company does.

s. 4(c)(i) However payment of a debt or liquidated amount by instalments out of profits does not in itself make the creditor a partner.

Cox v Hickman: (before partnership act, but judgement basically codified under s. 4(c)(i))o Sharing of profits is strong evidence of

partnership but NOT conclusive.o Creditors holding business in trust,

running it, until paid off by the profits of the business

s. 4(c)(ii) A contract for the remuneration of an employee or agent by a share of profits does not in itself make that person a partner (i.e. a bonus based on profits)

s. 4(c)(iii) Spouse or child of deceased partner who receives payments out of profits is NOT a partner merely b/c of the profits. Would need something more to consider them a partner.

Special Profit- Sharing arrangment

s. 4(c)(v) A person receiving a goodwill payment out of the profits of a business is not a partner merely because of this payment. Need something more to prove partnership.

“goodwill” is the value of a business beyond its assets, i.e. how much money it could make. So often when selling a business, a vendor takes payment for the cost of assets and then agrees to get further ‘goodwill’ payments out of the profits… as a way of assuring the buyer that the business really does have goodwill value.

s. 4(c)(iv) (i) An advance of money by way of a loan

(ii) To a person engaged in business or about to engage in a business

(iii) On a contract between that person and the lender

(iv) Where the contract is in writing(v) The contract is signed by or on

behalf of all the parties to it(vi) Under the contract the lender is to

receive a rate of interest varying with the profits or a share of the profits from the business

DOES NOT OF ITSELF make the lender a partner… need something more.

Re FORT: (English CA) doesn’t actually have to be “in writing” to fall under s. 4(c)(iv)

Canadian Commercial Bank: If the loan merely provides for payments of profits until the principal amount plus set interest is paid off, then this is a s. 4(c)(i) situation and NOT a s.4(c)(iv) this because s.4(c)(iv) is for situations where the lender gets a bigger potential for gain, thus suffers more risk under s. 5… if they don’t get this potential for gain, not fair to hold them to more risk under s. 5

Pooley Need to determine whether an arrangement is a loan or not in order to see if it fits under s.4(c)(iv),

(but remember it is still just a presumption, so even if it is under s.4(c)(iv) it could still be a partnership if there is SOMETHING MORE to indicate that)

Factors that indicate PARTNERSHIP:o Having an interest in the capital of the

partnershipo Ability of alleged lenders to enforce the

terms of the partnership agreement degree of participation and control

o Terminating ‘loan’ agreement when lender goes bankrupt… inconsistent w loan but NOT w partnership

o ‘loan’ agreement term coincides with term of partnership.

Martin v Peyton

To determine if it is a s. 4(c)(iv) situation consider factors that are consistent and inconsistent with Partnership.

BUT REMEMBER, any of these factors that indicate LOAN rather than partnership could be put in to a partnership agreement, so just have to determine if their collective effect outweighs any finding of partnership.

Factors that indicate a LOAN:o Securities invested would be returned

to investor—in partnership property becomes property of partnership, not returned to individual

o Providing security interest to the lender, normally partners do not provide security interests for the contributions of other partners

o Keeping loaned property separate from partnership property, can sell, substitute, retain all profits from, retain all interest from, and generally just treat separately rather than merging with partnership property.

o Inability to bind the partnership or initiate action on their behalf

Factors that indicate PARTNERSHIP:o Share of profitso Life insurance on lender, who continues

to be managing directoro Being advised on conduct of business

and consulted for important matterso Ability to inspect the bookso Ability to veto business thought too

riskyo Ability to accept resignationso Option to join the firm and increase

interesto Partner’s right to draw funds fixed by

‘loan’ agreement.s.5 A creditor who fits the description under

s.4(c)(iv) or is entitled to ‘goodwill’ under s.4(c)(v) is not entitled to recover anything when the debtor dies insolvent or goes insolvent UNTIL THE OTHER CREDITORS HAVE BEEN SATISFIED

Canadian Commercial Bank: s.5 does NOT apply to situations like s. 4(c)(i) if repayment out of profit is limited to principal and fixed interest rate.

(this is b/c s.5 refers to a ‘contract’ which appears in s. 4(c)(iv) but NOT s. 4(c)(i)

Sukloff: Where there is a security interest, s. 5 does not apply makes sense b/c you can check to see what security interests exist before you advance a loan, but if just a loan w/o security under s. 4(c)(iv) no way of knowing that so you might think it’s all equity investment.

Policy n/a Relianceo Want to protect 3rd parties that

reasonably rely on individuals being

Lepage v Kamex: NO partnershipo No one held the ‘partner’ out to a 3rd

party as having authority

in a partnership.o 3rd party may rely on unknown

individual, b/c assume a business isn’t %100 debt financed—so if you see a business w substantial assets you think there is someone w large equity investment behind it, so rely on this when advancing credit

o Not clear that 3rd party relied on other co-owners as partners

Martin v Peyton: NO partnershipo Lenders not part of operations so their

involvement would be unknown to 3rd parties, who would see business running as usual. NO direct reliance.

o But there would have been indirect reliance b/c likely would assume substantial capital behind business.

Unjust Enrichmento If you are sharing the profits, you

have the benefit of the credit that was advanced, so you are unjustly enriched if you aren’t liable for that credit. Criticism: if credit rate based on known partners, then unjust enrichment of creditor when it is unknown partner who is liable—perhaps they are eligible for a lower rate

Lepage v Kamex: NO partnershipo 3rd party would have benefited from

sale w/o actually selling it if they had found partnership (alleged partner entered into exclusive listing K which pays out regardless of who sells property)

Least Cost Avoidanceo Partners are in the best position to

assess the risk and control for it, so should bear the loss when things go wrong

o Putting the risk on the person who is most easily able to avoid it lowers the overall cost of credit, creditors charge more for bearing more risk.

Lepage v Kamex: NO partnershipo Co-owners had very limited control

over property, so ability to control risk was limited

Pooley: Partnershipo Alleged creditors under s. 4(c)(iv) type

situation were partners because they had good position to assess and control for risk

Promoting Arrangementso Creditor arrangements that include

repayment from profits like s. 4(c)(i) or s. 4(c)(iv) are useful for business

o If you couldn’t enter into these w/o being a partner (and thus losing possibility of recovery if business goes under) then no one would do them

o This means businesses that could likely succeed with some short term help would just have be broken up and sold for assets as no one could invest.

Cox v Hickman: NO partnershipo Business w financial problems, couldn’t

pay creditors—but business successful, so arranged for creditor trustees to help them out

o Creditors not partners even though they had the power to control business and shared the profits, likely to promote this type of arrangement and avoid bankruptcy.

Martin v Peyton: NO partnershipo Business in trouble, benefits all

creditors if this type of arrangement allowed and the business then succeeds

o If not allowed, no one would agree to be partner and creditors would all lose out… so useful to allow this arrangement.

Impossible Unless Partnerso If an arrangement effectively gives

someone limited liability in a general partnership, the law won’t allow for it.

o Have to use accepted forms of limited liability to get it.

o Otherwise, creditors would have to charge more b/c they would never know who had limited liability and who didn’t.

Pooley: Partnershipo People with substantial control and

share in the profits cannot just merely be creditors, b/c then other creditors will loan money thinking there is someone w money liable when in reality there is no one.

Weighing Factors

Backman The establishment of a partnership requires consideration of all the circumstances and a weighing of the relevant factors. It is not a process of a mechanical checklist.

(4) View of profit

Backman Profit doesn’t have to be the overriding intention, it can be ancillary.A business can incur losses, as long as there was a view for profit it can be a partnership.

GovernanceIssue Where NotesDefault PA Provides a default set of rules that governs the relationship between the partners in

ss. 21-34s. 21 PA Default rules may be varied by the consent of all partners, consent can be express or

inferred from a course of dealings.Property s. 23(1) PA Partnership property (s.6 = property brought into the partnership, acquired on

account of the firm or acquired for the purposes of and in the course of partnership business) must be held and applied for the purposes of the partnership in accordance with agreement.

s. 23(2) PA Land held in the name of one partner is held in trust for the otherss. 24 PA Property bought with money belonging to firm is partnership property

Day to Day s. 27 PA (a) share equally in capital, profits and losses(b) Firm must indemnify every partner for payments/ liabilities in (i) the ordinary and proper conduct of the business or (ii) for acts done to preserve the business or property of the firm(c) partner who makes an advance of capital over and above the contribution of capital he or she agreed to make is entitled to receive a payment of interest at a fair rate(d) a partner is not entitled to interest on the capital subscribed by the partner(e) Every partner may take part in the management(f) Partner not entitled to remuneration for working in the business(g) No new partner can be admitted without consent of each(h) Decisions on ordinary matters decided by majority, change in nature of partnership needs consent of all(i) Books are to be kept at the principal place of business and every partner may have access to the books to inspect or copy them

Removal s. 28 PA Majority CANNOT expel one partner unless there has been an express agreement and the power is exercised in good faith.

Fiduciary Duties

s. 22(1) PA Codifies common presumption that partners owe fiduciary duties to one another… “must act with the utmost fairness and good faith towards the other members”

s. 22(2) PA Preserves duties of equity or law that are owed in addition to the statutory duties.s. 31 PA Must render accounts and full info of all things affecting the partnership to any

partners. 32(1) PA Must account for benefits derived without the consent of the other partners from

transactions concerning the partnership or from the use of partnership propertys. 33 PA Partners must account for and pay over profits made from competing businesses

where they don’t have the consent of the other partners to engage in the competing business.

Rochwerg v Truster

Partners owe fiduciary duties to one another.

Mcknight v Hutchinson

Obligations were varied in express Partnership arrangement, allowed for involvement of other (non-competing) businesses with notice to other partners. Partner did not give notice so had to account for profits.

Assignment of Interest

s. 34(1) PA A partnership interest can be assigned, but this does not mean the assignee becomes a partner (i.e. can’t interfere w management), just gets share of profits and (2) assets on dissolution.

Liability of PartnersIssue Where Ratio NotesIn Contract s. 7(1) PA Every partner is an agent of the firm

and other partners for the purposes of the business.

Thus any contract a partner makes with a 3rd party binds the firm and all the other partners.

s. 7(2) PA Even if the partner is just “carrying on in the usual way business of the kind carried on by the firm” it binds the firm and the partners UNLESS:(a) The partner had no authority to

act for the firm in the particular matter;AND

(b) The 3rd party either knew the person dealt with had no authority OR did not know or believe the person he dealt with to be a partner.

Mirrors the concept of ostensible authority in agency law:o Protects reliance of 3rd partieso Where reasonable : i.e. not reasonable to

rely on someone who you don’t think has authority or who you don’t even realize is a partner.

o “knowing” in this case is objective—know or ought to know.

s. 8(1) PA o act or instrumento relating to the business of the

firmo Done or executed in the firm

name, or in any manner showing an intent to bind the firm

o by any person authorized to do so (whether a partner or not)

IS BINDING on the firm and all the partners.

This is broader than s.7, which deals with a very specific type of situation where it is reasonable to rely on a partner even though the partner maybe had no authority. Here you have to have authority.

s. 9(1) PA If the partner does something NOT connected with the firm’s ordinary course of business, then the firm is NOT bound unless the person was specially authorized.

Again, considering reasonable reliance, it is not reasonable to rely on for ex a lawyer doing some plumbing for you, so there is no protection of that reliance unless the law firm specifically authorized the lawyer to make plumbing Ks.

s. 10 PA If a 3rd party has notice of the restriction on a partner’s power, then any contravention of that restriction by the partner does not bind the firm.

Seems to overlap with s.7, but it is possible someone could “know” a person doesn’t have authority w/o specifically having “notice”.

s. 11 PA Debts = joint liability of partners, with several liability for the estates of deceased partners.

*can bring action against the estate of the deceased while being administered w/o barring action against living partners*

s. 19(1) PA

Someone joining an existing partnership is not liable for debts that arose before they joined.

s. 19(2) PA

Retiring partner is still liable for contracts created when they were a partner.

Creditor can agree to relive retiring partner from further liability (under s.19(3)) BUT this would have to be made at the time of K, not after.o Usually would make sense to have in very

large partnership w frequent turnover.s. 16(1) PA

A person who represents themselves to be a partner OR who knowingly

oCan be oral, writing or conduct.oRepresentation could be made by another

allows themselves to be represented as a partner, is liable to anyone who has given credit on the faith of the representation.

person as long as the one represented allowed it

oDoesn’t have to be awareness of a particular representation to a particular person—just allowing representation in general (s.16(1)+(2))

In Tort s. 12 PA Firm is liable for wrongful acts or omissions where a partner:

(i) Acted w the authority of co partnersOR

(ii) Acted in the ordinary course of business of the firm

o The liability is Joint and Several (s.14)o Liable the same way the person who

committed the act is liable.

Ernst & Young

o Lawyer guilty of fraudulent conveyances (helping bankrupt ppl hide their property and defraud creditors)

o Each transaction involved use of law firm, preparing dos, letters etc. all the normal real estate stuff.

o Partnership LIABLE

Thus, torts do not have to be for valid purposes of that business but could be for improper purposes. As long as they are “in the nature of acts normally performed”, the partnership will be liable.

Strother Wrongful acts or omissions includes equitable wrongs, such as breach of fiduciary duty.

Policy underlying the vicarious liability even where tort committed for improper or unauthorized purpose: Partnership has introduced the risk into the community, and is the best position to minimize, prevent or control the risk—so should bear the cost if risk materializes.

Indemnification n/a Tort or K claims—can satisfy full amount from any one or more of the partners.

A partner who is required to satisfy such an obligation can then seek contribution from the other partners in a separate action, always according to any terms in the partnership agreement.

Dormant Partners

Cox v Hickman

Dormant partners i.e. not involved in the management of the business are nonetheless liable for the acts of other partners in carrying on the partnership business.

Joint Liability vs Several Liability

s.53 Law and Equity Act

- Suing just one joint debtor does not relieve the other joint debtors of liability, there is no bar to proceeding against them afterwards.

- Joint debtor can get indemnification from other joint debtors if they have satisfied the claim.

Rule 20-1 Can sue in the name of the firm.Joint History

o Liability based on the same facts, i.e. four people all agreed to one loan agreement and then defaulted.

o Persons jointly liable, if ptf proceeds against just one then it is a bar to proceeding against any of the others

o Joint debtor cannot obtain indemnification from other joint debtors unless joined in the action.

o Defendant right to obtain stay until other defendants are joinedSeveral History

o Liability is not based on the same facts, but rather liability is based on different considerations for each person

o Suing just one does not operate as a bar to suing the otherso No automatic right of stay for defendents who want to join others.

Limited PartnershipIssue Section/

CaseNotes

What it is s. 50(2) PA Consists of (a) one or more general partners and (b) one or more limited partners.Creation s. 51(1) PA Must file a certificate under s.51 of the PA to create a limited partnership. Must be

signed by each general partner. CANNOT HAVE AN LP W/O FILING CERTIFICATE.s. 51(2) PA Certificate must state (a) business name (b) general nature of business (c) full name

and residential address of each general partner (d) term of existence (e) the amount of contributions provided or promised by limited partners (f) contributions provided or promised by general partners (g) basis on which limited partner are entitled to share profits or other compensation.

Naming s. 53(1) PA Must have a cautionary suffix, the name must have “Limited Partnership” at the end.s. 53(2) PA the name of limited partner must not be in the name of the partnership. Unless that is

(a) also the name of a general partner or (b) is the name they’ve been using before the addition of the same named limited partner.

Liability of LP s. 57 PA Limited to the amount the limited partner contributes or agrees to contribute (so can come after your personal interests for any further agreed contributions)

Liability of GP n/a Not limitedManagement of Business

s.64 PA Limited partner is not to take part in the management of the partnership, if they do they are liable as a general partner.

s.55 PA Limited partner cannot contribute services to the partnership, but they can contribute money and property.

n/a Common for LP to be set up with a corporation as the limited partner, thus to limit liability. However, what happens when limited partners are the directors of the corp?

Haughton Graphic Alta H.C.

If a limited partner takes part in the control of the business he or she is liable as a general partner even though the 3rd party did not rely on him or her as being personally liable.

o Alberta partnership act provides that limited partners are liable wherever the “took part in the control” of the business

o This case, limited partners were officers of corporation general partner, thus as they took part in the control, were liable as general partners.

Nordile Holdings BCCA

If you take part in management of the business in your capacity as an officer of the general partner corporation only then you will not be liable. However if you act in your capacity as a limited partner and take part in management, you will be liable.

o There is no defence of specific reliance… irrelevant whether 3rd party claiming actually relied on you as general partner. All comes down to what capacity you were acting in.

Return of Capital

s.59(2) No return of capital if after the return the partnership would be insolvent (i.e. no jumping ship)

Corporations

Benefits of Limited LiabilityUnlimited Liabillity Limited Liability

1. Valuation Costs

Need to Check-earning capacity (future cash flows) and risk-wealth of fellow investors

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 smallerpotential 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. Diversification

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

4. Liquidity lack of liquidity due to:-high costs of assessing value-controls on transfer of shares

provides liquidity since:-lowers cost of valuation information-less need for control over other investors

selling their investment

5. Optimal Investment Decisions

managers may not make highest value investment since must take account of diversifiable risk to which investors exposed, and compensations for valuation costs, monitoring costs and lack of liquidity

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

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

7. Economies of Scale

costs of unlimited liability rise as number of investors increase so harder to get accumulation of large number of equity investments – tend to need a few very wealthy investors to capture economies of scale

costs don’t increase as number of investors increases so it is easier to have a very large number of relatively small investments to accumulate funds needed to capture economies of scale

8. Transaction Costs

Can get limited liability through negotiating contracts with each creditor, but each transaction requires more cost then—must be negotiated.

Granting limited liability as a starting point avoid these costs since the costs of negotiating over limited liability only need to be incurred if the persons dealing with the firm want to override limited liability (by, e.g., obtaining a personal guarantee).

9. Tort Liability Expansion of negligence in the 20th century makes unlimited more risky

Victims of negligence can’t negotiate ahead of time to override a default limited liability… should policy concerns provide that in the case of neg it is always unlimited?

Incorporation Process

CBCAIssue Section NotesWho may incorporate

5(1) One or more individuals, none of the individuals may be:(a) under 18(b) of unsound mind as found by a court in Canada or elsewhere or(c) bankrupt

May incorporate by signing articles of incorporation and complying with section 7.5(2) One or more bodies corporate may incorporate by signing articles and complying

with s. 7Who is in charge 2(1), 260 2(1) The “Director” is appointed under s.260 by the Minister and carries out the

duties and exercises th powers of the Director under the Act.Articles 6(1) Must set out:

(a) Corporate name(b) The province in Canada where the registered offices of the corp will be

situated(c) The classes of shares and any max number of share that the corp is authorized

to issue(i) If there will be two or more classes of shares, the rights, privileges,

restrictions and conditions attaching to each class of shares;(ii) If a class of shares may be issues in series, the authority give to the

directors to fix the number of shares in and to determine the designation of, and the rights, privileges, restrictions and conditions attaching to the shares of each series;

(d) Any restrictions on the transfer of shares(e) The number of directors the corp is to have, or the minimum and max number

of directors it is to have(f) Any restrictions on the business of the corp

6(2) You can also put in any provisions that are permitted by the Act or by law to be set out in the by-laws of the corporation.

6(3) You can set out in the articles (or a unanimous SH agreement) a greater number of votes of directors or SHs than required by the act.

6(4) Except for the required number of votes to remove a director under s.109Signing of Documents

7 Articles of incorporation are sent to the Director along with docs that are required by s.19 and 106

19(2) notice of the registered office of the corporation must be sent to the Director106(1) Notice of the directors of the corporation must be sent to the Director

Naming **See below*

Cannot have a name that is confusingly similar to another corp or business… can get numbered name with “Canada ltd.” on the end OR if you want a different name, have to file a NUANS name search report.

Fees Reg 97 and Sched 5

Have to pay prescribed fees

Issuance of Certificate of

8 and 12(1)

If all the requirements are met, the Director shall issue the certificate. Granted as of right.

IncorporationDate of existence 9 Corporation comes into existence on the date shown in the certificate of

incorporation.Post-Incorporation 104 After the issue of the certificate, directors shall meet and they may:

(a) Make bylaws(b) Adopt forms of security certificates and corporate records;(c) Authorize the issuance of shares;(d) Appoint officers;(e) Appoint an auditor to hold office until the first meeting of shareholders(f) Make banking arrangements; and(g) Transact any other business

n/a Normally, at the first meeting directors will pass a set of general by-laws that will deal with matters such as:(i) Procedures at directors meetings;(ii) Notice for and procedures with respect to shareholder meetings;(iii) Procedures for the allotment and issuance of shares;(iv) Procedures for the declaration and payment of dividends; and(v) Procedures for the appointment of officers.

BCBCAIssue Section NotesWho can incorporate?

s. 10 One or more “persons”—(persons not defined in the Act) can incorporate a “company” under the BCBCA.

BCIA s. 29

Persons defined to include corporations or partnerships, therefore individuals, partnerships or corps can incorporate a company under the BCBCA

Company vs Corporation

s.1(1) A corporation is defined as a “company, body corporate, a body politic and corporate, an incorporated association or a society however and wherever incorporated.”A company is defined as a “corporation, recognized as a company under this Act or a former Companies Act, that has not ceased to be a company since the most recent recognition"Thus a company refers to an entity incorporated under the BCBCA (or forerunner) and corporation refers to a company incorporated under BCBCA or anywhere else in the world.

Who is the Admin?

BCBCA Called the “registrar” (rather than Director like in the CBCA)

Incorporation Process

376 Appoint one or more attorney10 First step: people who intend to incorporate must enter into an incorporation agreement

under which each incorporator agrees to one or more shares of the company in their own name

10(1) File an “incorporation application”10(3) Incorporation application must:

(i) Set out the full names and addresses of the incorporators(ii) Contain a completing party statement: provides for a person who examines

the “articles” and incorporation agreement to verify they are both properly endorsed by the incorporators and then files both the articles and the incorporation agreement at the records office of the company

(iii) Set out the full names and mailing addresses of the incorporators(iv) Set out the name of the company(v) Contain a notice of articles

11 Notice of Articles must be included and:(i) Set out the name of the company(ii) Set out the name and address of each of the directors(iii) Identify the registered office and its mailing address and delivery address(iv) Describe the authorized share structure(v) Set out for each class or series of shares any special rights or restrictions

attached to the shares12 Company must also have “articles” they must be filed by the person who signed the

“completing party” statement in the incorporation application. Must set out:(i) The rules for the conduct of the company(ii) Any restrictions on the business powers of the company(iii) For each class or series of shares, all the special rights or restrictions attached

to those shares12(4) The company may adopt the articles set out in Table 119 Notice of Articles and Articles are binding on the company and its shareholdersFees There is a fee for incorporation of $350 and a fee of $30 for a corporate name where it is

going to be something other than the numbered name22 Reserve a name: must make application for non-numbered name ahead of time, can be

reserved for up to 56 days. Indicate up to three names in order of preference.388 Each attorney for an extra-prov company is deemed to be authorized to accept service of

process on their behalf381, 382 Must file notices of any changes of attorneys for service, corporate name or

amalgamation380 File annual report updating filed info475 Prescribed fine13(1) Incorporation happens on the date and at the time the incorporation application is filed13(2) Registrar must issue certificate after all the steps have been done

Post-Incorporation

Different than CBCA b/c articles already are like by-laws etc. But at first meeting will likely want to deal with procedures for directors meetings, notice for and procedures of shareholder meetings, procedures for the allotment and issuance of shares, procedures for the declaration and payment of dividends, possibly also procedures for the appointment of officers or borrowing, adopt form for security certificates and corporate records.

Area of Operation

Bonanza Creek

Provinces can confer powers to companies to carry on business within the province and outside the province. However, can’t give the company the right to operate in another jurisdiction.

Which to Choose?CBCA BCCA

(i) Name protection(ii) No restriction on maintaining an action(iii) Lawyers and shareholder in other provinces are

familiar with it

(i) Lawyers here are more familiar(ii) Easier to deal with Victoria than Ottawa(iii) It is cheaper

Corporate Names

CBCAIssue Section NotesImportance n/a o value from recognition by consumers “goodwill”

o important for consumers not be confusedComplexity n/a o Many areas of law dealings with names: federal trade name and trade mark law,

provincial laws, corporate registration of names, common-law rules against name appropriation

Reserve a name 11(1) Can request a name which will be reserved for 90 days (either for new corp or for one that wants to change their name)

Number Name 11(2) Upon request, Director will assign a numbered name followed by “Canada” and a word or expression, or the corresponding abbreviation in s. 10(1).

12(4) Director may direct the corporation to change its name to a name other than the number in accordance with s.173 (need special resolution to do so)

Prohibited or Deceptively Misdescriptive

12(1) Corp cannot use a name that is (a) prohibited or deceptively misdescriptive or (b) reserved for another corp under s.11(1).

12(2) Director can order corp to change their name if they have a prohibited or deceptively misdescriptive name whether or not it is intentionally so.

Prohibited Words Reg 27 Obscene names preventedReg 25 Can’t use “parliament Hill” or “RCMP” or “Royal Canadian Mounted Police”Reg 27 Can’t use words that suggest business is carried on under gov authority/approval, is

sponsored or affiliated with gov unless gov consentsToo General Reg 30 Name is prohibited where it is too general i.e. shoe store ltd or just describes a quality

or other characteristic of goods or service (Running shoes ltd)Reg 30 Can’t use it if it is primarily the name of an individualReg 30 Can’t use it if it is primarily a geographic name

Confusion with Other Names

Reg 18 Can’t use if it creates confusion with other corporates names, business names or trade names.

Misdescriptive Reg 31 If it misdescribes the business, goods or services to be provided in association with the name, the conditions under which the goods or services will be produced or supplied or the place of origin of the goods or services = can’t use it.

Essential Elements 10(1) Have to have a descriptive suffix such as ltd, inc, etc. (most names also have a descriptive part and a distinctive part… but not required per se in this section)

Doing Business As 88 PA Any person (which includes a corp) must register their name under the PA if they are doing business under a name other than their own. Therefore corps that uses a business name other than its own corporate name must register that business name.

BCBCAIssue Where NotesWhat is the name s. 21(1) Once it becomes a company under this act the name is

(a) The name on the application if(i) the name has been reserved for the company(ii) the reservation is in effect at the date of recognition

(b) Otherwise, the incorporation number followed by “BC Ltd”How to reserve s. 22(1) Apply to the registrar

s. 22(2) Registrar may reserve the name for 56 days or any longer period they think is appropriates. 22(3) Registrar can extend if they receive a request to do so before the expiry of the reservation.s. 22(4) Registrar can’t reserve a name if it doesn’t comply with the other requirements in the acts. 22(5) If the registrar for good a valid reasons disapproves of a name, it contravenes the other

requirements.

Form of name s. 23(1) Have to have “limited”, “limitee”, “incorporated”, “incorporee”, “corporation”, “ltd”, “ltee”, “inc” or “corp” as part and at the end of its name.

Restrictions s. 24(1) Can’t use any of the above terms unless(a) You are a corporation or required to use those words(b) In the case of “limited” or “limitee” the person is

(i) A limitied liability company registered under s. 377 as an extraprovincial company

(ii) A limited partnershipUse the name s. 27 Have to display your name in legible English or French

(a) In a conspicuous position at each place of business in BC(b) In all noticies and official publications in BC(c) On all contracts, business letters and orders for goods, and on all its invoice,

statements of account, receipts and letters of credit used in BC(d) On all bills of exchange, promissory notes, endorsements, cheques and orders for

money used in BC and signed by it or on its behalf.Change name s.28(1) Registrar may order a change of name if, for any reason the name of a company

contravenes(a) Any of the prescribed requirements(b) Any of the other requirements in this division or(c) Any of the requirements in s.51.21

s.28(2) Can also do so for an extra-provincial companys. 28(3) But this doesn’t apply for federal corporations

Why IncorporateReasons Good BadLimited Liability o May give protection against

relatively insignificant trade credito Protection against personal liability

in tort

o May not provide benefit if you just have to give a personal convenant to get credit anyway

o Possible to pierce the corporate veil for tort claims

o Need to buy tort insurance regardless of whether you incorporate

Perpetual Succession o SP may have to assign contracts etc when they sell and this may be hard to do

o Can head the problem of reconstituting with death of partners or SPs before it happens in K

Ease of Transfer of Share

o Freely transferable unless there is an express restriction

o Securities laws do put certain restrictions on shares (esp for closely held corps)

o Added expense for compliance with securities law

Shareholders Alone Cannot Bind

o o In closely held corps the individual shareholders are usually the officers and have authority to bind

o Partners can constrain authority of partners anyway through express agreement

Shareholder Can Contract with Corp

o b/c separate legal entity, can contract with corp

o can achieve a very similar thing in partnership, can enter into K which is separate from partnership with the other partners.

Facilities for a Body Corporate to Secure Additional Capital

o Share and debentures o In partnership you could just get more partners or get partners to invest more funds

o Anyone can make debentures, just a doc that shows debt i.e. IOU

o Still have to comply with securities legislation when selling shares so hardly more ready source

Tax Advantages o “Small business deduction” can provide a tax advantage

o Private corps incorporated in Canada and carrying on active business can get a reduced rate on the first $500,000 of income (this is just deferral to avoid double taxation)

o Can control the timing of the distribution through the corp which permits tax planning

o Tax paid at the higher tax rate for the individual can be deferred which provides savings

o Losses incurred at the start up phase cannot be passed on to investors

Costs of Incorporation o o Fee for incorporation itself, few hundred dollars

o Legal feeso Filing annual reports with a modest feeo Maintaining certain records

o Filing additional tax return

Extra-Provincial Registration***lots more in the act so check it out***Issue Where NotesWho must register?

375 “foreign entities” must register as an “extra-provincial company” within two months of beginning to “carry on business” in BC.

Foreign Entity 1(1) Defined as a foreign corporation or limited liability companyForeign Corporation

1(1) A corporation that is not a “company”, that has issued shares (so not non-profit) and is not a co-operative association.

Company 1(1) A company incorporated under the BC BCA or a prior Companies ActCarry-on Business

375(2) You carry on a business in BC if:(a) its name, or any name under which it carries on business is listed in a telephone

directory(i) for any part of BC(ii) together with an address or telephone number in BC

or(b) Name appears or is announced in any advertisement in which an address or

telephone number in BC is given for the corpor

(c) In BC it has,(i) A resident agent(ii) A warehouse, office or place of business

375(3) You aren’t carrying on business in BC if:(a) You are a bank(b) If your only business in BC is constructing and operating a railway, or(c) You just have an interest in as a limited partner in a limited partnership in BC

Don’t have to register

375(4) IF(a) Principal business of the foreign entity consists of the operation of one or more

ships, and(b) The foreign entity does not maintain in BC a warehouse, office or place of business

under its own control or under the control of an agent375(5) But if you are an agent of a company in (4) above, then you have to file:

(a) A notice of agency which states(i) the name of the foreign entity(ii) the place of business outside of BC(iii) particulars of the agency agreement

(b) also file a notice of change if any of the above changesHow to register 376(1) Provide the registrar the records and info they may require and must:

(a) reserve its name or an assumed name under ss. 22 or 26(b) appoint one or more attorneys if required under s. 386(c) submit

(i) a registration statement(ii) any other records the registrar requires

Pre-Incorporation Contracts Someone promoting a new corp that is yet to be incorporated, may want to enter into contracts on behalf of the

corp to secure the contract sooner What happens if the corporation never comes into being? Is the promoter personally liable? If the corporation does exist, can it ratify the contract?

Issue Case/ Section

Ratio Notes

Old Common Law PositionGeneral Rule:Ratification

Kelner v Baxter (UK)

A person can ratify a contract entered into by another person on their behalf if:(i) The other person purported to act on

behalf of the person who seeks to ratify

(ii) The person who seeks to ratify must have been in existence and ascertainable at the time the other person purported to act on their behalf; and

(iii) 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 the ratification

Condition (ii) and (iii) make it impossible for a corp to ratify a pre-incorporation contract.

Liability of Promoter:The Contract

Kelner v Baxter (UK)

A promoter can potentially be liable on the contracts they purport to enter into on behalf of corporations not yet in existence.

Newborne v Sensolid (UK HL)

TEST: If the promoter intended, in the circumstances, to be a party to the contract or not.

Here, b/c promoter signed his name w/o the words “on behalf of x company” but overtop of a line that said “x company”, so indicated it was not intended for the promoter to be a party to the K and it could not be enforced.

Black v Smallwood AU HC

Affirmed UK approach of intention… here clearly intended to K with company so promoters not liable

Wickberg v Shatsky BCSC

A person signing on behalf of a non-existent corporation is not automatically liable for the contract. It depends on the intention of the parties.

However, even if it is not intended for the promoter to be a party to the contract, they can still be liable for breach of warranty of authority if they represent the existence of company that they know does not exist.

Liability of Promoter: Breach of Warranty of Authority

Black v Smallwood AU HC

Promoters could be liable for breach of warranty of authority.

Wickberg v Shatsky BCSC

Even if it is not intended for the promoter to be a party to the contract, they can still be liable for breach of warranty of authority if they represent the existence of company that they know does not exist.

Damages may be nominal where the corporation, or the business which it was intended would be carried on by the corporation, is now insolvent.(b/c if there had been no breach you would have just had a claim against that company and they have no money, so you can’t get much)

Problems with this common-law position:o Risk for promoter and 3rd party that there would be no enforceable Ko Reliance will be defeated with potential unjust enrichmento i.e. one promoter could bear all the liability rather than spreading it among all the promoterso i.e. a promoter could perform a K, but then not enforce the 3rd parties performanceo Unnecessary costs: both parties have to verify that a corp exists—makes more sense just to put this cost onto

the promoterso Reasonable to allow corp to adopt contract b/c that is who 3rd party wanted to contract with: BUT consider, then

promoters could create contracts and set up a shell corp to adopt the Ks so that if it doesn’t go well, 3 rd party has no remedy… speculating at the expense of the 3rd party… gain on it if it goes well, no risk if it doesn’t.

Creative Ways of Enforcing under Law & Equityo For the Company: Treat the promoter as a trustee of a chose in action for the corporation. This puts the

promoter under a fiduciary obligation to enforce the contract and would allow an order permitting the company to sue in the name of the promoter as trustee.

o get the court to treat the contract as having been assigned to the companyo although there is no contract, perhaps there was a ‘quasi contract’ or unjust enrichment which would allow for a

restitutionary remedy. Court can mitigate the loss of one party that performed under the belief that there was a K…

o Part performance of the terms of the original attempted K might allow the court to infer a second contract was entered into by the parties once the corp came into existence.

o If you view the promoter as an agent for the third party, then they have authority to make an offer to the corporation with the same terms as the original attempted contract. Therefore a purported ratification would really just be an acceptance of the offer by the third party’s agent.

o View the contract as containing a condition precedent that the contract takes effect upon the incorporation of the company and its adoption of the k>.

Issue Where Ratio NotesStatutory Position: CBCAWhen will CBCA provision apply?

s.91 CA 1867 The Federal Government has residual power under s.91 to incorporate companies (as provinces can only incorporate those with provincial objects under s.92(11).

s.92(13) The province has control over property and civil rights, which includes contracts.n/a So can the federal gov regulate pre-incorporation contracts? Argue that it is ancillary

power to the power to incorporate so yes. But there is an ultra vires argument here.s.14(1) The contract must be written for the CBCA provisions to applyConflict of laws problem

Consider if the contract occurs in a province that still goes by common-law rules—CBCA would then be paramount. Or if it was intended to incorporate under CBCA but then was done under a diff statute, or vice versa.

Liability of Promoter:The Contract

s.14(1) CBCA A person who enters or purports to enter into a written contract in the name of or on behalf of a pre-incorporated corporation is personally bound by the contract.

Entitled to benefits and obligations.

Landmark Inns v Horeak

This section codifies the common-law position in kelner v Baxter.

But did not interpret what that position actually meant.

Exception s.14(4) CBCA EXCEPTION: if the contract expressly provides otherwise, the promoter is not liable.Landmark Inns v Horeak

Having the name on the company on a contract is not sufficient for the purposes of s.14(4). Need an EXPRESS provision.

Ratification by Corporation

s.14(2) CBCA A corporation can ‘adopt’ a contract a reasonable time after it comes into existence by any action or conduct signifying its intention to be bound

If they do adopt, then(a) They are bound by the K and

entitled to benefits relating back to the time of acceptance of the K as if they existed then.

(b) Promoter ceases to be personally liable… also no longer entitled to the benefits.

Landmark Inns v Horeak

A corporation cannot adopt a contract that has already been repudiated by the promoter… thus adoption cannot relive the promoter of liability under s.14(1) where the promoter has already repudiated.

Bank of Nova Scotia v Williams

As long as the third party was aware of who they are dealing with, they accept the risk of the solvency of the corporation and cannot go after the promoters. However if the corporation adopts a contract on the eve bankruptcy, the promoters may still be liable.

Here corp had not ratified the pre-incorporation contract, but they had issued a promisory note. This was satisfactory to relive the promoters of liability.

Statutory Position: BC Business Corporations ActWhen does it apply?

s. 20(2) Not limited to written contracts b/c says “purports to enter into” a K… so could be oral. Referring to “company’ so under s.1(1) this means incorporated under the BCBCA.

Liability of Promoter: The Contract

s.20(6) Whether or not the K is adopted by the corp, (3)The company, facilitator or party to the pre-incorporation contract may apply to the court for an order (a) to set the obligations between the company and facilitator as join or joint and several OR (b) apportion liability between the company and facilitator.

Liability of Promoter: Breach of Warranty

s.20(2) When a facilitator purports to enter into a K on behalf of a company not yet in existence, they are (a) deemed to warrant that the company will (i) come into existence within a reasonable time and (ii) adopt the purported contract within a reasonable time after incorporation.

s.20(2)(b) Facilitator is liable to other parties for breach of warrantys.20(2)(c) Measure for damages for breach of warranty is the same as if (i) the company existed

at the time the contract was entered into (ii) the person who entered into the K had no authority to do so (iii) the company refused to ratify.

Exception s.20(8) A facilitator is not liable if the parties to K have expressly agreed in writingRatification by Corporation

s.20(3)(b) New company may within a reasonable time after incorporation adopt the pre-incorporation contract by any act or conduct signifying its intention to be bound by it.

s.20(4) If company adopts, facilitator ceases to be liable for breach of warranty of authority, but may still be liable under s.20(6) and (7) (see above)

s.20(5) If new company does not adopt within a reasonable time after incorporation, any party to the pre-incorporation K may apply to the court for an order directing the new company to restore to the applicant any benefit received by the new company under the pre-incorporation K.

Practical Advice:o Promoters should be warned of the problem and instructed not to enter into Ks on behalf of the corp before

incorporationo If need to do so, incorporate quickly under a numbered name and then change the name later as name

problems can slow down incorporationo Always check the corporate registry to confirm the corporate status and that they remain in good standingo Need to make sure you know where corporation has been incorporated, and have the correct corporate name in

order to check: differences such as “inc.” vs “incorporated” could lead you to the wrong company.o Major transactions often require a certified copy of the certificate of incorporation from the secretary of the

corporation as a closing doc for the transaction.

Legal StatusIssue Where Ratio NotesGeneral Salomon A corporation is a separate legal entity.SH/Creditor Salomon Therefore a shareholder can also be a

creditor of a corporation, and can rank equally or even ahead of other creditors depending on the type of security taken.

Ex: Salomon, who was a SH, had a debenture which ranked him ahead of other creditors. B/c company was separate person, this was ok and creditors couldn’t go after Salomon personally.

SH/Director/ Officer/ Employee

Lee Therefore, even a sole shareholder of a company can be an employee, an officer, and/ or the director of the company.

Ex: Lee, sole SH of Lee’s air Farming as well as director, officer and sole employee, was injured at work. Lee died in work accident. Wife still eligible to claim under worker’s comp b/c company employed him as they were separate people.

Assets Macaura The corporation owns the assets, not the SH’s, as shares are just bundles of rights that give a right of action against the company.

Ex: SH insured timber of corp, timber burned down, insurance held invalid b/c SH had no insurable interest: the corp owned the timber not him (note insurance aspect has been over-ruled, but for our point of ownership still good)

Problems Created By Legal Status:(1) SHs may cause the company to become indebted to the SHs when the company is insolvent or about to become

insolvent in order to defeat the interests of creditors(2) Company may make payouts to SHs when it is insolvent, defeat creditors(3) Company may enter into Ks with SHs that are unfavourable to other SHs or creditors(4) Can have a company with very little capital and defeat interests of creditors or third party tort claimants(5) Parties may be deceived into thinking they are dealing with an individual or partnership, not a corp(6) Persons may incorporate to avoid personal obligations or restrictions i.e. not allowed to carry on a business in a

certain area due to employment K, so create corp to carry on that business (it isn’t you)

Disregarding the Corporate EntityIssue Where Ratio NotesGeneral Principle

Salomon A corporation is a separate legal entity and thus SHs are not personally liable for the debts or torts of the corporation.

Exception Kosmopolous The Salomon principle is not applied if it is “too flagrantly opposed to justice” to do so

However no consistent principle as to when this is

Reasons For disregardingAgency Salomon: TJ If the corporation is an “agent” of the SH,

then the SH can be found liable on contract or vicariously liable for torts

This is b/c SH is being found liable not as an SH but rather as a principal.

Failure to Keep Separate Entity by SHs

n/a Failure of the SHs to maintain the separate identity may encourage courts to disregard it as well.

i.e. no corporate meetings, or records, or separate accounting books

Conduct Akin to Fraud

n/a Conduct that does not amount to fraud at common-law but rather is something that is “akin” to fraud is sometimes cited by Courts as a reason for disregarding the corporate entity

i.e. where parent corp using subsidiary to avoid liability, see below.

Subsidiary as Agent for Parent Corp

Smith, Stone and Knight

TEST to determine if subsidiary is just agent or alter ego of parent:

(1) Were the profits treated as profits of the parent company?

(2) Were the persons conducting the business appointed by the parent company?

(3) Was the parent company the head and brain of the trading venture

(4) Did the parent company govern the trading venture, decide what should eb done and what capital should be embarked on the venture?

(5) Did the parent company make profits by its skill and direction?

(6) Was the parent company in effectual and constant control?

So if you pierce the veil of subsidiary, it just leads you back to parent corp, no SHs are actually liable just parent.

Problem: Most situations the answers would be yes in each, so need something more… See cases below.

Alberta Gas Also, have to consider: what purpose and in what context is the Court being asked to ignore the subsidiary?

Gregorio The test (above) must be satisfied so that the parent company is in complete control AND the subsidiary is being used merely as a conduit for the parent company to avoid liability

Looking for something “akin to fraud”

Transamerica There is no presumption that the court will disregard the subsidiary, have to satisfy the test above with attention to principle in Gregorio.

Situations Where the Court is More Likely to DisregardGap Filling in K:

Using corp as device to avoid contractual obligations

Policy Not possible to think of every single scenario that could arise, so this reduces transaction costs and makes contracts more efficient.

Gilford Can’t use corp as “sham” or “cloak” to avoid obligations under another K. Court may disregard a corporate entity in a way that amounts to gap filling in a contract. In this way Courts are just enforcing what the parties intended and would have written in the K had they turned their minds to the issue at hand.

Ex: Def had non-competition clause in employment K. So Def started corp and began competing that way. Court held Def liable as SH by holding intention of employment K was to prevent this type of activity as well.

Patterson- Boyd

Pierced the corporate veil to get the results the parties intended from K that stated corp would not pay principal or interest on any loan from a shareholder or associated company. SHs created diff corp and gave it priority, so pierced the veil of that corp to hold SHs liable and fulfil intention of first K.

Gap Filling in Statute:

Using corp as device to avoid statutory obligations

Policy Avoid costs associated with having to legislate against every possible avoidance technique.

British Merchandise

Cannot use a corporation as a device to avoid legislative requirements. (arguably this is statutory gap filling b/c court is saying legislature intended this to be prohibited and would have written it in to legislation if they had turned their minds to it)

Ex: law said couldn’t hold both an A and a C licence, so Def who had an A license, created corp and tried to get a C license with it… was refused but this was legit b/c even though separate people was just using as device to avoid the law.

Dunford, “the corp Veil in Tax ”

Income Tax Act: most frequent statute that corps try to avoid obligations under. Used to be construed strictly, no tax imposed unless clearly set out. Now courts more willing to disregard separate entity where set up purely to avoid taxes.

Affiliated Corporations

Mangen Corp willing to disregard corporate entity of subsidiary,

POLICY: all shares of subsidiary owned by parent corp. Thus not really holding any individual personally liable—just holding another corp liable and the benefits of limited liability are not lost.

Ex: Parent corp owns four subsidiary taxicab companies, ptf injured after swerving to avoid cab, parent company held liable after corporate veil of subsidiary pierced.

Misreps n/a Where equity investors misrep the extent of liability, hold them liable in order to avoid extra costs in business transactions that would otherwise result.

POLICY: Put burden on Corp to avoid misrep, b/c they are in the best position to do so.

Costs Such As:creditors would just charge extra to everyone in case there was limited liability, or incur extra screening costs to ensure liability of debtor.

Gelhorn Where individuals deal with organization pre-incorporation and are not made aware when the business does incorporate, hold the SHs liable.

Chiang Where name of business on bill doesn’t reflect corporate status, hold SH personally liable.

Tato Where officer fails to comply with corporate formalities and doesn’t use correct name, use a separate bank account etc. then hold officer personally liable.

Even though other party here arguably assumed dealing with corp, perhaps justified b/c easier for officer to avoid the mistake.

Roydent Failure to register business name of Even though no reliance by third

unincorporated division of corp misleading says “and co”, gives impression division is its own corp. Thus hold SH of parent corp liable.NOTE ON EXAM: just b/c it says “co” after name DOES NOT MEAN it is necessarily a corp—could be SP or Partnership.

party (didn’t attempt to verify), but this would have been impossible b/c name not registered anyway. Easier for SH to avoid misrep by registering DBA name.

10(5) CBCA Must use cautionary suffix eg LTD after name for corps… failure is offence under s. 251 BUT Courts often use this as a basis for making SH personally liable.

Wolfe v Moir Failure to observe corporate formalities and use name on ticket, advertising and side of building = Court hold SH personally liable for tort

Tort Claims n/a Reasons to Pierce Veil for Tort Claimants:(1) Compensate the Tort Victim

o Assets of corp may not be enough to fully compensate victim(2) Incentive Costs and Efficiency

o Business may put incentives in that increase risk of tort i.e. pay driver per delivery so they go faster

o Making them liable reduces likelihood that they will do this and decreases risk of injury in community

o Force managers to take full cost of decisions into accounto Business in best position to reduce the risko Provides incentive to carry better insurance

Reasons Not To:o Don’t want to lose benefits of having limitied liability to society i.e.

diversification in investmentPolicy: o Where cost of unsatisfied compensation greater than benefits of limited

liability, makes sense to pierce veilo Where there is only one or very few SHs this will especially make sense, as

benefits of limited liability are very small

Other Ways to Disregard1. Tort Action

Against Directors, Officers or Employees

n/a As corp has no hands and can only act through humans, torts must be committed by one or more individuals. Therefore, sue the individual personally for their tort (corp will still be vicariously liable as officer would be acting as their agent) and you avoid the corporate veil that way.

Berger v willowdale

Employee slips on ice at work, unhappy with Workers Comp, so sues boss personally who is officer of corp—held not barred by Workers Comp as officer is not an “employee” of company, nor is officer the “employer”.

As boss here had personal duty of care to ensure ice cleared, was personally liable.

Exception Said v Butt Obiter: officer who causes breach of contract between corporation and 3rd person is NOT personally liable in tort.

Obiter: this does not preclude liability of servant who authorizes torts such as assault, trespass, nuisance etc may be liable as joint participant.

McFadden The exception that an agent of a corp is not liable for causing breach of contract only applies where the agent was compelled to do so in order to fulfil their to duty to act in the best interest of the corporation.

General Rule: Agent is always liable personally for their tortious acts, notwithstanding that their actions may in law also be those of the corporation.

ADGA systems

Exception insures that victims will not have double claims: one for breach K against corp and one for causing breach of K in tort against agent AND so that agent capable of directing a breach of K where it is in the company’s best interest to pay damages instead.

Otherwise, individuals are liable for their personal conduct.

Modern Rule: Narrowed

Rafiki Properties

Director/Officer/Employee “can only attract personal liability if they are acting outside the scope of their authority in being motivated by advancing a personal interest contrary to the interests of the company, or by fraud, or with malice”.

Better Off Dead

Only where the torts show “an identity or interest separate from that of the company” will an officer etc. be held personally liable.

Policy Concerns o Making directors, officers and employees personally liable will create incentive to take sufficient care

o However this could cause excessive deterrence and managers might empty business coffers in an effort to avoid personal liability

o This excessive deterrence in turn could be controlled by indemnifying the directors and officers through the purchase of insurance

o However, difficulties arising from the potential scope of liability in pricing insurance may lead to absence of insurance available for certain types of losses i.e. environmental losses

o Insurance crisis could limit the effectiveness of insurance solutiono But insurance regulation in turn could be used to avoid crisis—rather than refusing to make

individuals personally liable for their actions.2. Use of

Corporate Oppression Action

s. 241 CBCA Where the conduct of a corporation is oppressive or prejudicial against the interests of a complainant, or just unfairly disregards those interests in the complainants capacity as a “security holder, creditor, director or officer”, the court may order relief.

s.241(3) wide powers for providing relief, including s.241(3)(i) “an order compensating the aggrieved person”

PCM Court can make an order for Ex: corporation was shell, ptf was

Construction compensation against a particular director or officer.

wrongfully dismissed, ordered other directors to compensate due to oppressive conduct under a similar provision in AB.

Platinum Wood

Generally wrongful dismissal doesn’t amount to oppression under s.241, but it does “when there is an intimate connection between the employment contract and the shareholders agreement”.

Ex: here, individual accepted 30% shares instead of 50% in exchange for being appointed president. When wrongfully dismissed by those with the 70% control, this amounted to oppressive conduct. Those SHs personally liable for the wrongful dismissal suit.

Glasscell Creditors can use this section as well, here creditors have judgment against corp and garnish bank account. So SH set up different company and continued carrying on business under that company with original company’s assets and employees… that way original company ceased to operate and no money in bank account. Amounted to oppressive conduct.

3. Knowing Assistance in Breach of Trust

M & L Travel Can be liable for knowing assistance in breach of trust if the person had actual knowledge of the breach or were reckless or wilfully blind towards the breach. *carelessness of breach is not sufficient

Ex: company authorized to sell air Canada tickets as trustees, to hold $ in separate trust account but don’t just put in it general account. Directors liable as they directed and authorized the deposit of the funds in the general account.

Statutory Ways of Piercing Corporate VeilCBCA s.

118(1)Directors can be personally liable for (voting for or consenting to) accepting any consideration other than money for the issue of a share under s. 25—jointly and severally liable to the corporation to make good any amount by which the consideration received is less than the fair equivalent of money

s.118(2) Directors vote for or consent to a resolution that authorizes:(a) Purchase, redemption or other acquisition of shares contrary to section 34, 35 or

36(b) Commission contrary to s. 41(c) Payment of a dividend contrary to s. 42(d) Payment of an indemnity contrary to s. 124(e) Payment of a SH contrary to s. 190 or s.241

Are jointly and severally liable to restore to the corp any amounts so distributed or paid (that haven’t otherwise been recovered by the corp)

s.118(3) Director who pays a judgment under this section is entitled to contribution from any other directors that voted for or consented to the act in issue.

s. 118(4)

If you are liable under (2), you can get a court order compelling a SH or other recipient to pay back any money or property that was given contrary to sub 2

s. 119 Directors are jointly and severally liable to employees for a max of six months of unpaid wages.

Led to problem of all directors resigning when financial difficulties arise to avoid personal liability

Bankruptcy and Insolvency Act

s. 136 Upon bankruptcy, high priority given to debts owed under s. 81.3s. 81.3 Includes unpaid wages to a max of six months or $2000.

Ultra ViresIssue Case/

SectionRatio Notes

The Doctrine Asbury Railway

A company cannot act in pursuit of objects not set out in their memorandum of incorporation (now articles) as this is ultra vires the company, in the sense that it is beyond the capacity of the corporation. Therefore, any such act (i.e. creating a K) is void.

Ex: object was “to make, sell or lend or hire, railway plant, fittings, machinery and rolling stock”. It was ultra vires to enter into K to build a railway—building not an objective.

Policy 1. Protectors creditors and investors from changes in the risk that may occur should the company pursue other objectives.

2. Constrain quasi-public corporations to their quasi-public purposes, i.e. where funds raised to build railway can’t now go build a private a yacht club with it.

3. Controls the risk of bankruptcy b/c directors can’t just jump on whatever risky commercial enterprise comes their way… have to stick to the objects

Overridden (Can’t Apply to)

CBCA ss. 15(1), 16(2), 16(3)

15(1) provides a corp has the capacity of a natural person, but 16(2) can’t carry on business or exercise power in manner contrary to articles. Nevertheless, 16(3) no act/ transfer of corporation is invalid by reason only that the act/ transfer is contrary to its articles or this act.

SO doesn’t apply to CBCA corps. Any statute of gen incorp (all in Canada?) that has provisions like this will also not apply to.

No longer applies in UK pursuant to an EU directive

n/a Doesn’t apply to companies created by letters patent or crown Charter b/c these have long been recognized as having the powers of a natural person, so capacity is not at issue.

Applies to n/a Corporations formed under special acts (i.e. to form that particular entity) where no provisions alter the ultra vires doctrine or incorporated in jurisdictions where ultra vires still live.

Constructive Notice and Indoor Management RuleIssue Case/ Section Ratio NotesOriginal Form Still Applies to: Corporations formed under special acts (i.e.

to form that particular entity) where no provisions alter the doctrine of constructive notice or incorporated in jurisdictions where it is not overridden by legislation.

Perhaps by preserving indoor management rule under CBCA still room for it to apply…

Constructive Notice

3rd parties deemed to have knowledge of any restrictions on power of the corporation, so cannot rely on apparent or ostensible authority of directors or officers when attempting to enforce a contract. Can only rely on actual authority.

This is b/c the memorandum of association which set out the restrictions on power was publicly available.

Exception: Indoor Management Rule

A third party is NOT deemed to know of any indoor or in-house restrictions on the authority of directors or officers.

SO can enforce K based on apparent or ostensible authority (subject always to actual notice, of course)

i.e. articles say can grant a security interests in assets if approved by a majority vote of shareholders, but shareholders minutes not publicly available so no way of knowing if this has happened.

Legislative Modifications

CBCA s. 17 Eliminates the constructive notice doctrine for corporations incorporated under the CBCA

CBCA s. 18 Codifies the indoor management rule as corporations CANNOT assert 3rd parties are deemed to have knowledge of breach of articles, by-laws or unanimous SH agreements OR the place identified as registered office is not their registered office.

However, always open to corporation to prove 3rd party had or ought to have had knowledge of the constraint. Just can’t say it is assumed they do, have higher burden of proof.

Authority and Powers of DirectorsIssue Where Ratio NotesManagement Power CBCA s.

102The directors manage or supervise the management of the corporation. (default provision)

Broad power, so suggests that it operates as a residual i.e. any power not explicitly set out is by default the director’s power under the management power.

Restricted Delegate power

CBCA s. 115(3)

Restricts power of directors to delegate authority in certain circumstances, thus implicitly suggests delegation is a residual power of directors under the management power s.102.

Adoption/ Amendment/ Repeal of By-laws

CBCA s. 103

Power of directors to do so, subject to (i) the articles (ii) the by-laws (iii) a unanimous SH agreement.

Any change made by directors must be put before SHs at next annual meeting, only effective until this meeting. SHs must ratify for changes to continue to be in effect.

Power to Borrow CBCA s. 189(1)

Power of directors to do so, subject to (i) the articles (ii) the by-laws (iii) a unanimous SH agreement.

CBCA s.189(2)

May delegate this power subject to any restriction in the articles, by-laws or unanimous SH agreements

Power to Issue Shares

CBCA s. 25

Directors have power to do so.

CBCA s. 27

May issues shares in series if articles say so.

Appointment of Additional Directors

CBCA s. 106(8)

Director may appoint one or more additional directors but limited to amount of one-third of the directors elected at the previous annual meeting

Filling a Vacancy CBCA s. 111

Directors have power to fill a vacancy that arises at the death or resignation of a director, or if director removed and not replaced by SHs.

CBCA s. 166(1)

If auditor resigns during the year directors can replace them unless articles say position of auditor can only be filled by a vote of the SHs (s.166(3)).

Calling a Meeting of SHs

CBCA s. 133

Directors are to call annual or special SH meetings.

Appointment of Officers

CBCA s.121

Directors designate the offices of the corp, appoint officers (subject to articles, by-laws or unanimous SH agreement).

Delegation of Powers

CBCA s. 121

Directors can delegate powers to officers subject to articles, by-laws or unanimous SH agreements

Important b/c otherwise directors as fiduciaries to the principal corp would perhaps not be able to delegate powers.

Compensation CBCA s. 125

Directors have power to determine the remuneration for the directors, officers and employees of the corp.

Scope of Director’s Delegation PowerIssue Where Ratio NotesPower CBCA s.

115(1)Directors can delegate powers to a managing director who is a resident of Canada or to a committee of directors—subject to s. 115(3)

CBCA s. 121

Subject to bylaws, articles or unanimous SH agreement(a) Directors can appoint and delegate powers to officers, except powers in s. 115(3)(b) Directors can be officers(c) Two or more offices can be held by one person

Restrictions CBCA s. 115(3)

Restricted from delegating these powers though:

(a) Submitting matter to SHs that requires SH approval

(b) filling a vacancy among directors or auditor

(c) issuing securities except as authorized by directors

(c.1) issue shares of a series except as authorized by directors(d) declaring dividends(e) purchasing, redeeming or

otherwise acquiring the shares issued by the corp

(f) pay a commission referred to in s.41 except as authorized by directors

(g) approve a management proxy circular

(h) approve a take-over bid cicular or director’s circular

(i) approve any financial statements under s. 155

(j) adopting/ amending/ repealing by-law.

Important b/c otherwise SHs right to replace directors would not be an effective means of control… if directors had delegated all their power it would do nothing.

Extent of Delegation

Hayes Directors cannot delegate all their powers and replace the SH’s formally established management, and by-laws which seem to do so must be read down.

Despite fact that by-law said committee were to be given “full powers” of directors, could not have ALL powers—not powers to replace formal management structure. Could only have “ordinary business” transaction powers.

Long time period

Sherman & Ellis

Cannot essentially delegate all powers away by instituting a long-term managerial contract.

Contrary to public policy to create management K where (i) time frame too long and (ii) delegates all powers of management B/C there is an expectation that the corp be managed by the directors.

Extent of delegation

Kennerson The affairs of a corporation must be managed by the elected board of directors. Therefore, while the directors can delegate their authority to act they cannot delegate their authority to govern the corporation.

Policy n/a - New directors can always cancel management contracts that were instituted by former directors

- However if the damages for doing so are very large, this may operate to prevent this change—thus reducing SH control

- Case law could still be relevant… what if none of the s.115 powers delegated but ALL other powers delegated? Could still be improper

Removal of OfficersIssue Where Ratio NotesLong-term Ks Re

Paramount Corp

Where manager has long term K, board can dismiss them but damages must be paid

Policy: if you don’t enforce the Ks, then boards of directors would not be able to enter into such Ks.

Constructive Dismissal

Montreal Public Service

Where job essentially taken away but not actually fired, officer may still be entitled to damages for breach of K.

Where SH not directors remove officer

Shindler Even if officer dismissed by extraordinary resolution of SHs (here power to do so set out in articles) can still be entitled to damages for wrongful dismissal.

This is b/c where you enter into an agreement that requires an existing state of affairs to continue, you are in breach if you do anything of your own motion to put an end to the state of affairs.

Here, the SHs was a company that had taken over Shindler’s corp. Before take over, company had entered into K with Shindler saying he would be director for ten years. Thus when “SHs” i.e. the original company that contracted with Shindler, decided to fire him, they were in breach of K.

Policy n/a - Trade off between advantages of long-term employment Ks and retaining the power for take-over.

- Employees may work for less if have long term security, also more likely to build up firm-specific human capital

- But take over is better for market as people won’t pay as much for shares that have little or no take over potential (i.e. no chance for SHs to replace management if they start doing a bad job)

- Courts have left it to Corps to decide how they would like to balance these concerns… courts enforce the Ks

- Can use “golden parachutes” or “tin parachutes” to counter-act problem.- These are where employment Ks have liquidated damage clauses should they

be terminated early- If too lucrative though, court might strike down (“golden” parachutes) so now

just have “tin” parachutes”- If there are parachute provisions, management less likely to resist take-over,

and existing managers are more accountable to SHs- But if too excessive, may also hinder take-over b/c might not be economically

worth it then.

Shareholder PowersIssue Case/ Section Ratio NotesGeneral Management PowersWho manages? s. 102 Directors manage corporation “subject to any

unanimous SH agreement” under s. 146 unanimous agreement that restricts in whole or in part the powers of the directors to manage is valid—as long as it is otherwise legal.

So by unanimous agreement, SHs can assign themselves management power. Would probably only be feasible in a closely held corp.

Can shareholder’s dictate to the board of directors?

Cunninghame The directors are not agents of the shareholders but rather of the company. Therefore, Shareholders do not have an overriding power to dictate to the directors: the articles of incorporation set out the director’s powers. Shareholders only have the powers to alter the articles that are given to them by the statute of incorporation and the articles themselves.

Policy: makes sense b/c would be really hard to run a company if shareholders could make day to day decisions.

See below, can effect management through APPOINTING directors.

What if there is a “deadlock” on the board of directors?

Barron v Potter

Shareholders were allowed to appoint new directors at an extraordinary meeting where the board could not agree and thus could not function.

However, appointing directors is a normal shareholder power. It is unclear whether a residual power exists for shareholders to exert power to break deadlocks over other types of management decisions.

Specific Shareholder Powers CBCAElection of Directors

106(3) Shareholders have power to elect directors at the annual meeting by ordinary resolution.

“ordinary resolution” CBCA s. 2(1) need majority of votes cast to pass.

Amendment of By-laws

103(1)-(4)

Default agreement that directors can change by-laws which are effective until next annual meeting at which point shareholders must ratify by ordinary resolution for the amendments to remain in force.

Can be altered by articles, by-laws or unanimous shareholder agreement.

103(5) Even if default rule not changed, shareholders entitled to vote at an annual meeting can propose changes to bylaws under this section.

Amendment of Articles

173 Fundamental changes require “special resolution” of Shareholders:(a) change its name;(b) change the province in which its registered office is

situated;(c) add, change or remove any restriction on the business

or businesses that the corporation may carry on;(d) change any max # of shares authorized to be issued(e) create new classes of shares;(f) reduce or increase stated capital if that is set out in

the articles(g) change designation of all or any of its shares, add

change or remove any rights privileges, restrictions and conditions in respect of all or any of its shares, whether issued or unissued

(h) change the shares of any class or series, into a different number of shares of the same class or series

“Special Resolution”: CBCA s. 2(1) need 2/3rds of votes cast to pass.

Only shareholders that have voting shares get to vote.

or ito the same or a different number of shares of other classes or series

(i) divide a class of shares into a series and fix the number of shares in each series and the rights associated.

(j) Authorize the directors to divide any class of unissued shares into series and fix the number in each series and rights attached.

(k) Authorize directors to change the rights, privileges restrictions and conditions attached to unissued shares of any series

(l) Revoke, diminish or enlarge any authority conferred under paragraphs (j) and (k)

(m)increase or decrease the number of directors or the minimum or maximum number of directors, subject to sections 107 and 112;

(n) add, change or remove restrictions on the issue, transfer or ownership of shares; or

(o) add change or remove any other provision that is permitted by this Act to be set out in the articles

173(3) Exception: if a corp has a designating number as a name, the directors may amend its articles to change that name to a verbal name.

Amalgamation of Corp w another Corp

183(3) Each shareholder has the right to vote regarding alamagamation whether or not the share otherwise has voting rights.

183(4) **there may be special class voting rights, see below***183(5) Have to approve by special resolution

Sale or Lease of all (or most) Assets

189(3) Requires the approval of SHs in order to do so other than in the ordinary course of business

189(6) Each share carries the right to vote whether or not it otherwise has voting rights189(8) Need special resolution.

Continuance in Another Jurisdiction

188(4) Each share carries a right to vote whether or not they otherwise have voting rights188(5) Need special resolution

Liquidation and Dissolution

211(3) May liquidate or dissolve by special resolution of shareholders (if there is only 1 class)

**may also have class voting rights see below**

Class Voting Rights 176(6) Class must approve by special resolution as a class (2/3rds of votes cast CBCA s. 2(1))176(5) Regardless of whether that class has voting rights generally176(1) Occurs when:

(a) Increase or decrease any max limit of the a class of shares, or increase any max of a class that has equal or superior rights to the shares of class that is voting.

(b) Where there is an exchange, reclassification or cancellation of shares of all or part of that class.

(c) Add, change or remove rights, privileges, restrictions or conditions attached to the shares of the class at issue and without limiting that:(i) Remove or change prejudicially rights to accrued dividends or rights to

cumulative dividends(ii) Add remove or change prejudicially redemption rights(iii) Reduce or remove a dividend preference or a liquaidation preference, or(iv) Add remove or change prejudicially conversion privileges, options, voting,

transfer or pre-emptive rights, or right to acquire securities of a corporation, or sinking fund provisions.

(d) Increase rights or privileges of any class of shares having rights equal to or superior to the shares of such class

(e) Create a new class of shares equal to or superior to a particular class(f) To make an inferior class of shares equal or superior to a particular class(g) Effect an exchange or create a right of exchange of all or part of the shares of

another class into the shares of such class(h) Constrain the issue, transfer or ownership of the shares of such class or change or

remove such constraint176(4) A series may be entitled to vote separately as well, but only if the series is affected by

an amendment in a manner different from other shares of the same classClass Voting: Alternate Situations

183(4) Class voting may also arise on amalgamation when the amalgamation agreement, if it was instead an article amendment, would entitle them to class voting under 176.

189(7) Class voting may also arise on sale, lease or exchange of all or substantially all the assets of the corporation if the class or series is affected differently from the share of another class or series.

211(3) Where a corp has more than one class of shares, on liquidation and dissolution each class must pass by special resolution regardless of whether they have voting rights. (if there is only one class then just need special resolution as per usual)

Shareholder Meetings

Duties of the ChairIssue Where Ratio NotesWho is the Chair

n/a By-laws of CBCA corps usually state that the chair of the board of directors or the president of the corporation is to act as the chair of the SH meeting

Duties of the Chair

Wall v London

The Chair must act in good faith and allow reasonable time for SHs to speak to matters and debate.

Therefore minority opinions cannot drag out the meeting as this could cause undue delay and expense.

Re Marshall

Chair not required to go behind the legal title of shares and make sure that the beneficial owner’s wishes are being respected on votes. Can just take the legal owner’s votes at face value.

Policy: Chair may not have legal training or time to consider disputes btwn legal and beneficial owners. Time to settle disputes would disrupt the meeting, and there would be uncertainty as to who could vote.

CBCA s. 51

Can treat the registered owner of a security as the person exclusively entitled to vote

Re United Canso Oil

Chair must act in an impartial manner. Can’t adjourn the meeting on their own.

Facsimile signatures of corporate SHs are good enough, and don’t need to see proof of authorization from the boards of corporate SH or from clients of stockbrokers unless there is a reason to question the validity of the authorizations.

Indemnification Blair Where Chair acts honestly and in good faith, chair is indemnified by the corporation.

Having an interest in the outcome is not evidence per se that the chair’s decision is not bona fide. Relying on professional legal advice may (but not automatically) satisfy requirement of acting honestly and in good faith—just need to have no obvious error.

Voting 141(1) Voting done by a show of hands unless a poll demanded141(2) Poll can be demanded before or after a vote by a show of hands

Minutes 20(1)(b) Minutes of SH meetings (signed by the Chair) must be kept.

Shareholder Requisitioned MeetingsIssue Where RatioWhen can SH requisition meetings?

CBCA s. 143 (1)

SHs of not less than 5% of the shares carrying voting rights at the meeting proposed may requisition the directors to call the meeting for that purpose.

Requirements CBCA s. 143 (2)

SHs MUST:- Prepare a doc setting out the purposes of the meeting- Sign the doc- Send the doc to each directors and to the registered office of the corp

CBCA s. 143 (3)

Directors MUST then call a meetingUNLESS

(a) Have already set a record date under 134(1)(c) and given notice of that under 134(3)

(b) Have called and given notice for a meeting already under 135(c) The purpose of the meeting is one for which the directors could refuse a SH

proposal under s. 137(5)(b) to (e)CBCA s. 137(5)

(b) it clearly appears that the primary purpose of the proposal is to enforce a personal claim or redress a personal grievance against the corporation or its directors, officers or security holders;(b.1) it clearly appears that the proposal does not relate in a significant way to the business or affairs of the corporation;(c) not more than the prescribed period before the receipt of a proposal, a person failed to present, in person or by proxy, at a meeting of shareholders, a proposal that at the person’s request, had been included in a management proxy circular relating to the meeting;(d) substantially the same proposal was submitted to shareholders in a management proxy circular or a dissident’s proxy circular relating to a meeting of shareholders held not more than the prescribed period before the receipt of the proposal and did not receive the prescribed minimum amount of support at the meeting; or(e) the rights conferred by this section are being abused to secure publicity.

Director Refusal CBCA s. 143 (4)

If directors do not call the meeting w/n 21 days, then any SH who signed the requisition may call the meeting and

143(6) the corporation will be charged for the expenses of the meeting unless the meeting resolves otherwise.

Meeting By Court OrderIssue Where Ratio NotesWho Can Apply

CBCA s. 144(1)

Director, SH who is entitled to vote at the meeting or the Director under the Act.

Authority CBCA s. 144(1)

Court may order a meeting of SHs to be held and conducted in the manner the Court says IF:(a) it is impracticable to call the meeting within the time/ manner they are supposed to be called;(b) it is impracticable to conduct the meeting in the manner required by this Act or the by-laws; or(c) OR for any other reason.

Re El Sombrero

Impracticable ≠ Impossible. Consider whether in all the circumstances it is practical to hold the meeting

*Closely Held*

Where two of three SHs holding only 100 of the 1,000 shares were preventing majority SH from exercising rights by refusing to call a meeting, it was impracticable to call the meeting in the manner normally required (there was a quorum of two)

Intervene on the basis of Fault

Re Routley Court will order where a director/ president has clearly breached the law and a court ordered meeting is needed to prevent future breaches.*Closely Held*

Here quorum required not possible, and when president did call a meeting at his own law office, he refused to accept valid proxies and continued the meeting w/o required quorum.

Vary Quorum: Deadlock

CBCA s. 144 (2)

Can order that quorum required by the Act or by-laws be varied—doesn’t limit generality of s. 144 (1) (other manner/form requirements can be made by court)

Re El Sombrero

Court ordered a meeting varying the quorum requirement of two where two SHs (50 shares each) were refusing to meet in order to prevent third SH (900 shares) from exercising their voting rights.*Closely Held*

Re Opera Court will vary quorum where person avoiding meeting and thus preventing quorum to avoid a majority SH exercising their voting rights… in this case to remove a person as director.

*Closely Held*

Two SHs (51% and 49%) and a two SH quorum required. Falling out btwn SHs and 49% refused to meet.

POLICY: minority SH has other remedies such as right to sell out or to bring an action for oppression or winding up.

Intervene in Battle for Control

Re Morris Funeral

Court will not vary a quorum where this would favour one faction of SHs over another.*Closely Held*

i.e. where there is a true deadlock (and not just a minority trying to prevent a majority from exercising their rights) the Court won’t get involved.

Re Barsh Court will not vary a quorum to favour one SH over another or to override the express purpose for which a quorum was created. Court will not exercise their discretion if this essentially locks one party into the company.*Closely Held*

- Here quorum of 3 intended to protect non-family member’s interests (3 SHs, one dad, one son and one other guy).

- Court doesn’t want to vary at request of family now.

- Also considering that non-family guy would be locked into a company with very little return

Re Canadian Javelin

Impracticable ≠ Impossible. Look at the circumstances and see if the meeting can be conducted w/o a court order or not.

Here could not be practically called w/o a court order b/c the effect of not having a meeting would be very detrimental to the interests of the company… could result in failure of future financing.

*Publicly Held*POLICY: Calling a meeting did resolve battle for control in favour of one faction, but b/c publicly held Court considering consequences of loss to public SHs if meeting not called… more than just favouring one side over another. More at stake.

Powers of SH at Court ordered meetings

Charlebois v Bienvenue

When ordering a meeting, court does not have the power to grant SHs powers beyond what they would normally have.

Here SHs only had powers to elect directors at annual meeting, so couldn’t elect at court ordered meeting.

Policy Reconcile Cases: Varying Quorum for Deadlock or intervening battles for control in Closely Held Corporations.

- Both Opera and Sombrero variation of quorum ordered where minority attempting to thwart majority from exercising their voting rights

- Morris an estate owned the majority of shares, but estate couldn’t vote b/c executors were on opposing sides… so it was a minority trying to force through a vote on directors, and therefore court wouldn’t vary b/c they would be favouring one minority over another

- Barsh on the other hand, Court wouldn’t vary in order to protect minority… here was this b/c there was clear intention that the quorum was set up in order to protect the minority—which was the basis of the agreement. Also court noted that wouldn’t vary if this meant locking one party in… so perhaps in Opera and Sombrero the minority SHs had other remedies available which were not available to minority in Barsh.

Proxy SolicitationIssue Where Ratio NotesWhat is a proxy? CBCA s.

147A form completed and executed by a SH that appoints a proxyholder, who is a person appointed to act on behalf of a SH

What is a proxyholder?

CBCA s. 147

A person appointed to act on behalf of a SH (not required to be a SH s. 148(1))

Who Can Appoint a proxy-holder?

CBCA s. 148(1)

A SH who is entitled to vote a meeting may appoint a proxyholder by using a proxy.

Rights of Proxy-holder

CBCA s. 148(1)

The same as the SH subject to the authority granted by SH.

CBCA s. 152(2)

Has the right to vote by show of hands, but would be constrained on a vote by show of hands where holds proxies requiring opposite votes, (but in that case proxyholder can demand a poll instead.)

Required Solicitation

CBCA s. 149(1)

Management must solicit proxies from each SH entitled to vote

CBCA s. 149(2)

unless it is (a) not a distributing corporation and (b) has fifty or fewer SHs entitled to vote at the meeting

“distributing corporation” is a corporation that has made a distribution by way of a prospectus under provincial securities laws (s. 2(1) and Reg s. 2)

Failure CBCA s. 149(3) & (4)

Failure to solicit proxies is an offence.

Enforcement CBCA s. 247

Can enforce through compliance order under this section.

Form of Proxy CBCA reg 54

Incorporates by reference the forms used under provincial securities regulation which are set out in the National Instrument (NI) agreed to by the Canada Securities Regulators and adopted by regulation under provincial securities regulation.

NI 51-102, s. 9.4(3)

Clear indication that someone other than the designated person can be appointed as proxy-holder.

NI 51-102, s. 9.4(1)

Person soliciting proxies must state who they are.

NI 51-102, s. 9.4(4)

Must allow voting for or against resolutions, or a bold-face indication of how the proxyholder will vote the shares.

NI 51-102, s. 9.4(6)

Must provide a means by which the shareholder can vote in favour of or withhold voting with respect to the appointment of an auditor or the election of directors

Proxy CircularsIssue Where Ratio NotesWhat it is n/a A doc that discloses sufficient info to allow a SH to make a decision on each matter of

business for which the proxy is solicited.Who must send

CBCA s. 150(1)

Anyone who solicits proxies must send a proxy circular

Referred to as information circular under provincial securities act. Note that b/c management MUST solicit proxies under s.149, it means they MUST also send a proxy circular.

150(1.1) Exception: don’t have to send a dissident’s proxy circular if the total number of SHs is fifteen or fewer

Two or more joint SHs are counted as one.

150(1.2) Exception: don’t have to send a dissident’s proxy circular if the solicitation is conveyed by public broadcast, speech or publication.

Meaning of Solicitation

CBCA s. 147(a)

(i) a request for a proxy, whether or not accompanied by or included in a form of proxy.(ii) “a request to execute or not to execute a form of proxy or to revoke a proxy”(iii) “the sending of a form of proxy or other communication to a shareholder under circumstances calculated to result in the procurement, withholding or resolution of a proxy”

CBCA s. 147(b)

(v) shareholders can announce publicly how they will be voting and reasons for it w/o triggering proxy circulation requirements.

USA revised their rules in 1992… adopted by CBCA in this section in 2001.

POLICY: institutional investors had increasingly significant investments, so couldn’t liquidate easily, needed it to be easier to influence management.

(vi) SH can communicate for purposes of obtaining number of shares required for a SH proposal under s. 137(1.1) w/o needed a proxy circular

** See SH proposals below**

Brown v Duby

Sending a letter asking shareholders not to sign management proxies and instead consider other information = soliciting a proxy.

CBCA requirements apply to all shareholders regardless of what country they are in.

Standard of disclosure

CBCA s. 154

If it contains- an untrue statement of a material fact- omits a required material fact, or- omits a material fact necessary to

make one of the statements in the circular not misleading in light of the circumstances in which it was made

Then, an interested person or the Director of the Act may apply to the Court, and the Court may make any order it sees fit, including but not limited to:(a) restraining the solicitation(b) ordering a correction(c) adjourning the meeting

Note post meeting remedies might include declaring resolutions passed at the meeting to be void.

Share Holder ProposalsIssue Where RatioSH proposals CBCA s.

137(1)A registered holder or beneficial owner of shares that are entitled to be voted at an annual meeting of SHs may:

(a) submit to the corp notice of any matter that the person proposes to raise at the meeting

(b) discuss at the meeting any matter in respect of which the person would have been entitled to submit a proposal

Who is entitled

CBCA s. 137(1.1)

IF:(a) the SH has been holder or

beneficial owner of the prescribed number of SHs for the prescribed time OR

(b) The SH and supporters hold or are beneficial owners of the prescribed number of shares for at least prescribed time.

Reg 46(a)Prescribed number:

(i) at least 1% of voting shares with(ii) (ii) a min fair market value of $2000

Reg 46(b)Prescribed time:6months period immediately before the day on which the proposal is submitted

What it must include

CBCA s. 137(1.2)

Proposal submitted under s.137(1)(a) MUST include:

(a) The name and address of the person and of the person’s supporters if any

(b) The number of shares held or owned by the person and the person’s supporters if any, and the date the shares were acquired.

Note that this does not form part of the proposal and isn’t counted towards the 500 word limit below (137(1.3))

What corp must do

CBCA s. 137 (2)

If the corp solicits proxies, they must set out the proposal in the management prxy circular required by s. 150 or attach it to that.

CBCA s. 137 (3)

If person proposing request, management will include a supporting statement of up to 500 words in the management proxy circular

Nomination of Directors

CBCA s. 137 (4)

If SHs have more than 5% of voting shares they can nominate directors in a proposal. However there can be more nominations at the meeting.

Timing CBCA s. 137 (5)(a)

Must be submitted at least the prescribed time (Reg 49: 90 days) ahead of the anniversary date of the notice of meeting that was sent to SHs regarding the previous annual meeting. If not complied with, management doesn’t have to put it in proxy circular.

Management doesn’t have put it in proxy circular if:

CBCA s. 137 (5)

(b) it clearly appears that the primary purpose of the proposal is to enforce a personal claim or redress a personal grievance against the corporation or its directors, officers or security holders;(b.1) it clearly appears that the proposal does not relate in a significant way to the business or affairs of the corporation;(c) not more than the prescribed period before the receipt of a proposal, a person failed to present, in person or by proxy, at a meeting of shareholders, a proposal that at the person’s request, had been included in a management proxy circular relating to the meeting;(d) substantially the same proposal was submitted to shareholders in a management proxy circular or a dissident’s proxy circular relating to a meeting of shareholders held not more than the prescribed period before the receipt of the proposal and did not receive the prescribed minimum amount of support at the meeting; or

(e) the rights conferred by this section are being abused to secure publicity.If Corp Refuses to put proposal in proxy circular

CBCA s. 137 (7)

Must give notice in writing to the person who submitted it with reasons for refusal.

CBCA s. 137 (8)

SHs can apply to the court for a consideration of whether the refusal was proper

CBCA s. 137 (9)

Corp can also apply to court to determine whether a proposal can be refused.

Policy n/a 1. Concern that proposals could be used to transfer day to day management decisions to SH meeting b/c

- SH meeting is cumbersome- Also SHs in widely-held are not very expert2. Concern that proposal may be used as a device for harassment- i.e. a competitor could buy some shares and then cause problems- crazy person with personal grievance3. Concern that meeting process could be bogged down by proposals that are

irrelevant to business or that corp has no power to do anything about.- Meetings are expensive- Gets in the way of legit business

Reasons to Refuse

Medical Committee for Human Rights

USA case, where corporations refusal of proposal was challenged… court said could not refuse proposal just b/c motivated by social cause if it was something that was within the powers of the SHs to do (in this case amend the articles).

Re Varity Corp

Proposal can be refused on the basis that it is for a political cause, even if it is something within the powers of the SHs to do such as restrict trade in a certain area (here it was South Africa during apartheid).

Greenpeace

Can refuse proposals that are primarily for a social cause. Note CBCA amendment in 2001 did away with restriction that said proposals couldn’t be for “promoting general economic, political, religious or social or similar causes”

Disclosure and Access to RecordsIssue Section NotesFinancial Disclosure

CBCA s. 155(1)(a)

Directors must put comparative financial statements before the SHs at every annual meeting

s. 158 Statements must be formally approved by the directorsReg 72(1) Must include (a) balance sheet, (b) income statement, (c) statement of retained earnings

and (d) statement of changes in financial position.Reg 72(2) But you don’t have to call them by those names, just have to serve those functions.Reg 71(1) The statement must be prepared according to Canadian GAAP (Generally accepted

accounting principles)Auditor CBCA s.

162(1)A distributing company’s SH must appoint an auditor at the first annual meeting and at every annual meeting afterwards by ordinary resolution

CBCA 163(1)

but a non-distributing company does not have to, have to resolve this at every annual meeting (163(2) and must be by unanimous consent (163(3)).

CBCA s. 169(1)

Auditor must make an examination as necessary to report on the annual financial statements in accordance with the guidelines set out in the CICA handbook.

CBCA s. 155(1)(b)

Report of the auditor must be put before the SHs at every annual meeting (if there is an auditor).

CBCA s. 161

Auditor must not have a conflict of interest with the corporation.(a) Independence is a question of fact(b) Can’t be independent if the person is, or if any of the person’s partners are:

(i) a business partner, director, officer or employee of the corporation or any of its affiliates, or the business partner of any of those.

(ii) a beneficial owner or controller (directly or indirectly) of a material interest in the securities of the corporation or any of its affiliates

(iii) has been a receiver, receiver-manager, liquidator or trustee in bankruptcy of the corporation or any of its affiliates within two years of the appointment of the person as auditor.

NI 52-108 The auditor of a “reporting issuer” i.e. a public corp must be a public accounting firm that has entered into a written agreement with the Canadian Public Accountability Board, a board that was set up by letters patent under the Canada Corporations Act.

NI 52-109 Chief Financial officer and chief executive officer must certify the statements saying “based on my knowledge, the annual financial statement together with the other financial information included in the annual filings fairly present in all material respects the financial condition, results of operations and cash flows of the issuer, as of the date and for the periods presented in the annual filings.”

Audit Committee

CBCA s. 171 (1)

A distributing corp must have an audit committee consisting of not less than three directors, a majority of whom are not officers or employees of the corp. A non-distributing may have an audit committee if they wish.

CBCA s. 171 (3)

Audit committee must review the financial statements before the statements are approved by the directors under s. 158.

CBCA s. 171 (4)

The auditor is entitled to notice of and to be present at every meeting of the audit committee at the expense of the corporation.

Records CBCA s. 20 (1)

Corporation is required to prepare and maintain at its registered office or at a records office designated by the directors, (a) the articles and by-laws and all amendments, a copy of any unanimous SH agreement, (b) the minutes of meetings and resolutions of SHs, (c) copies of the notice of directors and changes in the directors and their addresses and (d) a securities register that complies with s. 50.

CBCA s. 20 (2)

Corporation must prepare and maintain accounting records and minutes of director’s meetings.

Access to CBCA s. Non-distributing corps: the SHs and creditors and the director can have access to the

Records 21(1) corps records (other than the records of the directors meetings and the accounting records).Distributing: Any person can have access to the records of the corp, other than the records of the director’s meetings and the accounting records.

Securities Law Requirements

n/a Where a corp has distributed securities under a prospectus, the corporation becomes a reporting issuer and is subject to securities regulation. This includes financial disclosure, information circulars and annual informations, insider trading reports and timely disclosure. Must be in electronic form and is available on the SEDAR website.

Access to the List of ShareholdersPurpose:

o engaging in proxy solicitationo requisitioning a meetingo making a takeover bid

Issue Where Ratio NotesRequirement CBCA s. 20

(1) (d)Corp is required to keep a shareholder register with the names and addresses of the SHs

To inspect the list

CBCA s.21(1)

Right to inspect list of SHs at record office during usual business hours

Distributing: Any personNon: Creditor or SH

CBCA s.21 (1.1)

Person seeking to inspect must have an affidavit (same as affidavit below)

Cooper v Premier Trust

Court will intervene where the right to inspection is unreasonably refused. Have a statutory right to inspect during regular business hours, cannot say they can only come on such and such a day—agreement to that effect does not cancel statutory rights.

To obtain the list

CBCA s. 21 (3)

Can request a list of SH Distributing: Any personNon: Creditor or SH

Steps: CBCA s. 21 (3)

pay a reasonable fee (set by corp) and

CBCA s. 21 (7)

send an affidavit with name and address, and

CBCA s. 21 (9)

Indicate the list will not be used for a purpose other than:(i) an effort to influence the voting of share of the corp(ii) an offer to acquire shares of the corp, or(iii) any other matter relating to the affairs of the corp

Encana v Douglas

o Once the requirements of the affidavit are met, no requirement that the person identify a specific purpose just that they will not use it for a purpose other than the listed purposes under s. 21(9). Corporation does not have right to cross-examine applicant on their intended purpose.

o “any other matter relating to the affairs of the corp” may include purposes of personal gain, but using a SH list to “create a mailing list of high-net worth individuals to advertise or solicit investment in another enterprise” would not be a matter relating to the affairs of the corp.

No conflict w privacy legislation if using list for s. 21 (9) purpose.

* Here it was for the purpose of finding individuals who owned lost or forgotten shares and taking a fee for restoring the shares to them = acceptable purpose *

Honeywell o USA case where they said obtaining the list to communicate about something political (i.e. stop manufacturing fragmentation bombs) is not a proper purpose.

o Have to have a purpose that is connected with a genuine economic interest in the company.

CBCA s. 21(10)

It is an offence to use the SH list for a purpose not listed under s. 21 (9).

Obligation of Corp

CBCA s. 21 (3)

Corp must provide the list w/n ten days

n/a b/c corp has ten days, can take steps in response to knowing that something is up

Alternatively, you could inspect the SH register but this might be hard if there were lots of SHs

Closely-Held CorporationsIssue Where NotesDefinition CBCA s.2(1) Global definition applied to determine whether you are eligible for

modifications due to closely-held status= just can’t be a “distributing corporation” which means distributing shares under a prospectus or similar provincial securities regulation instrument.

Modifications CBCA s. 136 o SH can waive notice of meeting requiremento Not limited to closely-held but most useful for them

CBCA s. 139(4)

o Can have a one SH meeting if there is only one SH

CBCA s. 142 (1)(a) and (b)

o SH resolutions in lieu of meeting allowed if resolutions are in writing and unanimous

o Not limited to closely-held but not really practical for widely held.CBCA s. 163(1)

o For non-distributing corps, can dispense with requirement of appointing auditor

CBCA s. 171 o Don’t have to have an audit committee if you aren’t a distributing corpCBCA s. 149(2)

o Don’t need to follow mandatory proxy solicitation rules where corp is (a) not distributing and (b) there are fewer than 50 SHs.

SH Agreement to Control Voting

CBCA s. 145.1

o SHS can enter into agreements on how they will voteo Valid and enforceable.

Ringuet v Bergeron

o SHs can enter into valid and enforceable agreements on how they will exercise their voting powers

o NOT against public policy to do so.Ringuet v Bergeron

o However directors CANNOT enter into agreements on how they will vote as directors

n/a o Therefore, if SHs have an agreement that they will not vote out X as president, and SHs are also directors, SHs in capacity of directors can still vote out X despite agreement.

o Makes SH agreement not as effective.CBCA s. 102 o Directors manage corp subject to unanimous SH agreement

o s. 146 SHs can agree unanimously to reallocate management to SHs, or restrict management powers of directors in any way.

o If this is done, then SH agreements regarding voting are enforceable AND effective.

What powers can SHs take with unanimous agreement?

Step 1 o Identify the power SHs wantStep 2 o Find provision that provides for that powerStep 3 o See what methods can be used to reallocate the power (will say in

provision)o For ex, articles, by-laws or unanimous SH agreement

Step 4 o Assess which doc would be most appropriate to use to reallocate powero In closely held, this is normally the unanimous SH agreement

Step 5 o Put how SHs will exercise the reallocated power in the doc that you choose to use.