What is a business?
Broad definition = provision of goods or services

Not limited to for-profit – includes non-profit

Broad definition includes non-profit societies and charitable foundations, government activities and organizations, municipalities
Stakeholder – anyone affected by a business
Equity Investors
Creditors
Employees
Consumers
Competitors
Local Community
Managers Suppliers Broad Community
For the focus of this course look at the relationships of equity investors, creditors, managers, employees
1.
Agency a.
Involves Agent (A) who is granted rights by the Principal to conduct various aspects of the business on his/her behalf b.
A affects the P’s legal relations with other parties
2.
Sole Proprietorship a.
Has one equity investor = sole proprietor b.
The SP is NOT a separate legal entity c.
It is the sole proprietor who owns the assets of the business, enters into K’s on behalf of the business, is personally liable for it d.
SP comes to an end on the death of the sole proprietor e.
Obtains funds from himself as well as from creditors i.
Frequently, the creditors will want to impose restrictions on how the business is run to protect their investment f.
The sole proprietor can engage employees and agents to help carry out the business
3.
Partnership a.
Partnership = when persons act IN COMMON with a VIEW TO PROFIT b.
More than one equity investor – they are called the partners c.
Partners act as agents for each other d.
The partnership is NOT a separate legal entity, so all the partners are personally liable e.
The partners themselves are the ones who enter K’s, hire employees/managers f.
Usually they all want to have a say in how the business is run g.
May borrow funds from creditors h.
Relationship ends on death or bankruptcy of one of the partners – but can be reconstituted afterwards
4.
Limited Partnership a.
A type of partnership that has limited partners and at least one general partner b.
The limited partners’ liability is limited to the amount of their investment c.
The general partner’s liability is not limited and so may be found personally liable for the business
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d.
Limited partners generally have less stake in the business and so less involvement in its management e.
Again, NOT a separate legal entity f.
All the partners own the assets of the business
5.
Limited Liability Partnership a.
A type of partnership where the partners are not considered to be acting as agents for each other b.
Often formed by a group of professionals, but not limited to them in BC c.
What happens is that if a partner commits a wrong, the other partners wont be held liable for the activity unless if they were directly involved or were supervising it d.
MUST have LLP after name in order for this to work e.
Otherwise, they function as ordinary partnerships – LLP is NOT a separate legal entity
6.
Corporation a.
This IS a separate legal entity b.
It is the corporation that owns the assets and is liable in tort, contract, and criminal proceedings against it c.
Because its not a person, the corporation engages agents and directors that act on its behalf to enter K’s, hire employees etc d.
The corporation can borrow money from creditors e.
Its existence is perpetual (doesn’t end because an agent or director has died) f.
Must have at least one equity investor, rights to a corporation are sold in bundles of units called shares g.
A person who owns a stake in the corporation is thus called a shareholder h.
Liability of these equity investors/shareholders is limited to their investment i.
Must have an indication after its name to signify it’s a corporation j.
No limit on management input by shareholders
7.
Business Trust – set up a trust for the purpose of conducting a business a.
Allows you to avoid taxation that would happen in a corporation - $100 flows into the trust, $100 flows out of trust to investor, so no money left in trust and no money is taxed b.
What happens is that settlors settle the title to property with one or more persons called the trustees, who then have to use the title to the property to the benefit of other people, called the beneficiaries c.
Set out the details of the trust in a “trust instrument” d.
The settlors, trustees, and beneficiaries can be different people, or the settlors can be the beneficiaries or the trustees or both e.
A trust is NOT a separate legal entity, and the trustees are liable in law for the actions of the trust – they are the ones who enter the K’s, conduct the business, etc f.
A trust can be set up to perform like a corporation i.
The settlors (ie equity investors) settle funds with the trustees who are charged with managing the money for the beneficiaries (ie the equity investors themselves) ii.
The trust instrument is set up to appoint trustees by the beneficiary-investors
(replicating a board of directors) and trustees can be given power to delegate their powers to other people (ie managers of a corporation)
8.
Co-operative Associations a.
These are corporations set up not to give benefit and profit of dividends to the investors, but rather to people who become members of the co-operative b.
The members might receive benefits in the form of lower prices for goods or reduced fees for services
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9.
Societies/Non-profits a.
Set up by different statutes – in BC, we have a Societies Act b.
These operate like corporations, and are separate legal entities c.
People who take on roles akin to shareholders are members who elect a board of directors that manage or supervise the management of the non-profit corporations’ activities d.
The members MAY be the persons who receive the benefits of the activities performed by the non-profit
10.
Unincorporated Association a.
These occur when people carry on activities in common with no view to profit b.
Not a separate legal entity – treated like partnerships c.
Members of these associations can be liable as agents for each other d.
Can engage other agents, employees, creditors
11.
Joint Ventures a.
This is not a legally recognized term – so NOT a separate legal entity b.
These occur when people come together with a common goal/objective c.
People agree to combine skills/resources/funds/time/knowledge in the pursuit of some common objective d.
They all agree to share in the profts and the losses
12.
Franchises a.
Involves a franchisor granting one or more rights to a franchisee such as i.
Right to sell franchisor’s products ii.
Use its name iii.
Use its methods iv.
Use its Symbol, other trade marks b.
Involves at least 1 of three basic elements i.
Know-how by the franchisor ii.
Joint purchasing power to decrease amount spent iii.
Image recognition by the franchisors’ marketing team
13.
Multiple Contracts a.
Instead of forming any association, could enter contracts for each stage of production, distribution, marketing b.
Not very cost effective – will often spend a lot of money entering into tons and tons of different contracts c.
Break everything down so there is NO joint or group activities
Types of financial statements
1.
Income Statement

Meant to show whats been hapeening over time with profits and losses

List and add up all the revenues, list and subtract all the expenses and you are left with a gross income
2.
Balance Sheet

A snapshot in time of a businesses assets and liabilities

Can be left/right or top/down

One side should list all the sources of income (liabilities) and the other side should list the uses of the income (assets)
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3.
Statement of retained earnings
4.
Statement of change in financial position
Key Terms

Assets = something acquired for the purposes of the business that retains value to the business over a period of time

Liabilities – fixed obligations. For example, take out a loan from the bank. You will have a fixed obligation to pay it back say once a month with a fixed percent of interest

Equity – right to residual amounts o Two types – first, on dissolution of the business, you are entitled to the equity that is left after all liabilities have been paid, and second, while the business is in operation, you are entitled to the gross profits after payment of expenses

Trade Credit – “take now, pay later” o If the business borrows from suppliers with the intention of paying them back later, then they are taking goods from the supplier on “trade credit” – this would go under
“accounts payable” on a balance sheet o If the business allows a consumer to purchase something with the promise of paying it back later, the consumer is purchasing on trade credit – this would go under accounts receivable on the balance sheet

An agent is someone who affects the legal relations of another person (the principal)
 This usually occurs by the A entering into K’s on behalf of the principal o A enters the K for the principal (who is disclosed) with X. The K is between X and P, not the A and X

The agent owes a fiduciary duty to the P, but the P may be held vicariously liable for torts committed by the A in the course of his dealings

Agency and Employment o Not all employees are agents, but they can be
 Not all employees have legal right to enter into K’s on behalf of their employers o Conversely, not all agents are employees

Agency and Trusts o They are similar in that both agents and trustees owe a fiduciary duty o DIFFERENCE – the acts of the A bind the P, but the acts of the trustee don’t bind the beneficiary o FURTHER – the P is liable – personal creditors of agents can come after the property held by the agent even if the agent is holding that property for the P

BUT persons who have advanced credit to a trustee not involving the trustee’s activities in connection with the trust (ie personal creditors) do not have access to the trust assets to satisfy their claim
The extent to which an agent can affect the legal relations of a principal depends on the authority the agent has.
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Two types – actual and ostensible
Actual Authority
Actual authority occurs where the P intended to give the agent authority to affect his/her legal relations, or where the P and A would have reasonable expected the A to have authority

Does not require consideration – A can act gratuitously (hence why not always employee)
TWO TYPES
1.
Express – this is where the P stated the agent’s authority either orally or in writing a.
This includes authority that can be inferred from written or oral words
2.
Implied – the authority the P and A would have reasonable expected/understood the A to have in the circumstances. Courts look to: a.
Customary i.
Determined by looking at what authority agents of this type normally have ii.
Example, stockbrokers are normally allowed to do certain types of things on behalf of their P’s. Bank managers typically allowed to do certain types of things on behalf of the bank. iii.
Would make an argument that agents of this sort customarily have the authority on which the A acted and there is nothing express (careful!) in the express grant of authority that is inconsistent with this b.
Usual i.
What this particular agent with this particular P has been allowed to do in the past ii.
For example, if the A has done certain things in the past that are outside the express authority, but were never objected to, the A may be said to have actual authority
Freeman & Lockyer v. Buckhurst Park Properties (1964, QB)
Facts : Kapoor was acting as though he was the managing director (president) of a company. The board of directors never actually appointed him (no express actual authority). But they were aware of he was acting as such and allowed him to continue to do so.
Issue : Was the Company bound by his actions?
Decision : Actual authority could be implied from the circumstances, by looking at what they had
USUALLY allowed him to do.
Limitation : If the express actual authority clearly prohibits the agent from engaging in particular acts on behalf of the P, then a few ratifications of acts of the agent contrary to the principal will
NOT normally be sufficient to say the agent had implied authority.
Wiltshire v. Sims (1808)
This case deals with Customary Implied Authority
Facts
: Stockbroker sold customer’s shares on credit.
Issue : Was this a violation of agency?
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Decision : Yes. There was no express authority to sell the shares and no express prohibition to sell shares on credit. HOWEVER although stockbrokers have authority to sell shares for their clients, stockbrokers don’t normally have the authority (so no customary authority) to sell shares on credit .
Duties of Agent to Principal

Agent owed certain fiduciary duties to the P

These duties are implied terms based on the relationship – the P and A are free to vary these terms by express agreement

S. 122 – Statutorily mandated duty of care of officers and directors of corporations
Duty 1 – To perform the tasks that have been assigned to the A according to the terms of the agreement with the P or according to the Instructions of the P
Duty 2 – To act in the best interests of the principal
Duty 3 – To perform the tasks with reasonable care

Note – this duty is NOT from Donoghue v. Stevenson – has been around much longer than this case

The standard of care is said to be the degree of skill and diligence which an agent in his or her position would normally possess or exercise
Duty 4 – The duty not to delegate

There is an exception when the implied term of non-delegation is not reasonable in the circumstances o Or if there is express authority to do so, or if the A can be said to have implied authority to delegate in the circumstances o Ex. Ship carrying perishable goods were rotting in hold. The captain put to shore and engaged an agent to sell the goods. Held that the captain had authority to delegate in the circumstances. He wouldn’t have known the local market where he put in to respond to the emergency. Arguably necessary.

Remedies for delegation – damages for any loss and possibly an injunction against any further delegation

Rationale for this – the P engaged the agent because he had faith in HIM – not someone else to enter into K’s on his behalf
Duty 5 – to avoid conflict of interest between the duty to principal and personal interest

For example, if a P employs an A to buy goods on behalf of the P, the agent cannot buy goods from himself on behalf of the P. There are clear competing interests – the P wants to pay the lowest possible price while the A wants to sell them for the highest possible price

REMEDY – contract is void and the agent is required to account to the P for any profits made in the transactions

Damages would be available to compensate for losses from the conflict of interest, and could get an injunctions against future ones

NOTE – CBCA ALLOWS FOR CONFLICT OF INTEREST SO LONG AS THE CONFLICT
IS KNOWN, PERSON IS NOT INVOLVED IN PARTICULAR DECISION, AND THE
DEAL MADE IS FAIR FOR THE CORPORATION
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Duty 6 – Not to make secret profits

Common example – purchasing agent who gets some kickback from making a particular purchase from a particular supplier

A loss to the P could occur because the A may not have obtained the lowest possible price for the goods, and has actually made a profit on the side

REMEDY – A would have to account for the amount of the benefit the A received and could be required to pay damages that result from not getting lowest price goods

Example – an A that acts on behalf of competing principal (ie sells goods for two P’s without the other knowing about it)
Thompson v. Meade (1891)
Facts : Stockbroker asked to sell shares for a certain price ($10) but sold them for more ($12) and pocketed the difference
Decision : Stockbroker required to account to the P for the extra profit made.
Duty 7 – To keep proper accounts
 If doesn’t, there is an evidentiary presumption against the A

The court will take a view of the amount of profit to the A or loss to the P that is most favorable to the P
Duties of Principal to the Agent
Duty 1 – to pay remuneration

This is frequent, although an A can work for free and the default rule is NO REMUNERATION

Requires an express agreement

HOWEVER even if there is no express agreement, if circumstances indicate that the A would clearly not have been inclined to act gratuitously, the court will award remuneration o Awarded on a quantum meruit basis (ie, what would an agent normally be paid in the circumstances)

HOW TO GET REMUNERATION: o Agent must be performing the obligations required by the agreement o Agent must be the effective cause of the sale/K/etc

Exception – when the A is an exclusive agent (ie where the agent is to be paid whether or not the A is the effective cause)
 Requires express agreement to override the implied term
Duty 2 – to pay the expenses of the agent and indemnify the agent against losses

In both these cases, A has to be acting within scope of actual authority
 Expenses can’t be incurred by fault of the A

Blair v. Consolidated Enfield
Termination of Agency
By the Act of the parties

If the agency agreement provides for the termination, according to these provisions
 When the agreement doesn’t provide for it, it is unilaterally terminable on notice o No requirement for a reasonable notice period
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o Can be terminated by either party immediately on notice
By Operation of Law

If either the A or the P becomes bankrupt o Rationale if P is bankrupt – A looks to P for payment and thus can’t expect them to continue the relationship without it o Rationale if A is bankrupt – A’s often end up holding money/property for the P and the
A’s creditors can access this (remember above!)

Frustration – the purpose of the agency agreement no longer exists

Death of P or A – the relationship of faith is gone
Third Party Relationships
Third parties are those affected by the acts of A’s on behalf of the P.
Actual Authority is more important when assessing the relationship between the P and the A
But some relevance here

If the A is acting within the scope of actual authority to enter a K with another person on behalf of the P, and if it is clear that the agent is acting as an A in its dealings, then the K, if otherwise valid, will be a binding K between the P and that third party

P can enforce the K against the third party and vice versa

NOTE – the A is NOT a party to the K (unless the A was clearly intended to be)
Ostensible Authority
Also important between the P and third parties
Can arise even when no Actual Authority – ie no express or implied authority
If ostensible authority is proven, there will be a valid contract between the third party and the principal, and either can sue for cause in action of breach of contract .
TWO ELEMENTS
1.
Alleged principal must have made or permitted a representation that the alleged agent had authority to act on behalf of the alleged principal a.
Interpretation of “representation” is broad – can be express or implied from the words, conduct, circumstances of the P
2.
The third party relied on the representation to his detriment a.
Reliance suggests the third party wouldn’t have taken the action otherwise b.
Reasonably – the third party should have taken obvious and easy precautions
Freeman & Lockyer v. Buckhurst

The representation operates as an estoppel, preventing the P from asserting he is not bound by the K

Irrelevant whether the A had actual authority to enter the K

The representation most common = conduct of permitting the A to act in some way in the conduct of the P’s business with other persons o Leads to people believing the A has authority to enter K’s on behalf of the P
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
This case is actually decided on this principle – by allowing Kapoor to act the way he was, the fulfilled condition 1 and the Plaintiffs, who relied on that representation suffered a detriment because of it
Rationales for Ostensible Authority
Question - Who should bear the loss?
1. Protection of reliance interest of third party

They reasonably believes the person had authority, and suffered a detriment because of it

Competing interest with this is unfair surprise

BUT where the alleged P could have readily taken steps to avoid reliance by third parties, then the alleged P should not be unfairly surprised
2. Least Cost Avoidance

This is meant to protect broad societal interest

There should be an obligation to avoid the loss on the person who can avoid it at the least cost

This gives the alleged P an incentive to avoid the loss and reduces the cost incurred in avoidance of such losses

The P can: o Check the A’s trustworthiness before engaging him o Monitor the A’s behavior o Dismiss A’s that act beyond their authority o In these cases, not having the P responsible for the A’s authority would defeat the whole purpose of agency

If the responsibility was left on the third party, they would all have to contact the P each and every time to confirm the A’s authority

ON THE OTHER EXTREME – if the alleged agent is a complete fraud, then the third P is probably in the best position to avoid the loss because they have at least had some contact with the fraud

Or if there is suspicious activity by the A

The second requirement of reasonableness allows the courts to find fault with the third party sometimes too
Note – if the third party is successful, the P could then turn and make a claim against the A for going outside their scope of authority AND if the claim against the P fails, the third party can still try and make a claim against the A for breach of warranty of authority
Breach of Warranty of Authority
A BWA is a claim by a third party against an A where the A warranted that she had authority but in fact did not have either actual or ostensible authority .
So, third parties have two options
1.
Claim against the alleged P on the basis that the agent had authority (actual or ostensible)
2.
Claim against the alleged A for BWA
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THREE ELEMENTS
1.
Agent represents that she has authority
2.
That representation is false
3.
The third party reasonably relies on the representation to his detriment
Remedy – an expectation measure of damages (separated this from tort of negligent misrepresentation, which has reliance based measure of damages)
Ratification

When the A acts beyond his authority, the P may nonetheless choose to accept what the A has done by ratifying the act of the A
A person can ratify a K entered into by an A on their behalf if THREE ELEMENTS satisfied
1.
The A purported to act on behalf of the P who seeks to ratify
2.
The P who seeks to ratify was in existence and was ascertainable at the time the A acted
3.
The P who seeks to ratify must have had the legal capacity to do so both at the time the A acted and at the time of ratification
NOTE – use of P and A is incorrect here – there may not be an agency relationship to start with, as a person can purpose to act on behalf of another person even though they have to authority to do so.
Two requirements for ratification to be effective
1.
P must have done something to ratify (can be express, by conduct, or by acquiescence) a.
Express can be orally or in writing b.
Conduct can be sufficient too – any performance or part performance of the terms of the
K by the P may be sufficient to = ratification c.
P can also be considered to have ratified by simply waiting to see what happens over a period of time (acquiescing)
2.
Ratification must be based on a full knowledge by the P of all important relevant facts a.
P is consenting to a transaction the A had no authority to enter, so the P needs to know the nature of the deal being accepted b.
NOTE – this is likely more about big aspects of the deal – won’t relieve the P of obligations because not informed of relatively minor aspects
Consequences of Ratification

Ratification relates back to time of offer and acceptance b/w A and third party
 Now it’s a binding K, so the P can sue the third party and be sued by the third party

The third P can no longer sue for breach of warranty of authority

A no longer liable to P for exceeding authority

And the P will be liable to the A to pay remuneration, expenses, indemnify against loss
Policy Reasons for Ratification
1.
Mutual Benefit a.
At the time of offer and acceptance, there is presumable some benefit from the transaction for the third party b.
When the principal then ratifies, there is presumably some benefit – otherwise why ratify?
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2.
Unjust enrichment of principal at expense of agent a.
If A acted beyond authority, would be liable for loss to the P b.
The P will benefit if the transaction goes well, but the A will loose out if the transaction goes poorly because will have to compensate the P for it c.
Big potential for upside gain, little or no downside risk d.
Also, protects the A because requires that the P be obliged to pay remuneration etc once it is ratified
3.
Unjust enrichment of principal at expense of third party due to speculation a.
Can’t just allow the P to sit and wait to see if the deal will turn out well for them b.
Say price goes up – the P will ratify the old contract for the better price c.
If price goes down – the P won’t ratify the K because can find for a better price elsewhere d.
Same goes for conduct – cant just let them perform part of the contract that is favorable and then not the rest e.
The requirement that the P be in existence and ascertainable is also important here, because otherwise someone could purport to act on behalf of corp that is not yet incorporated, and then when the corp never comes into existence so it doesn’t have to ratify, there is no way for the third party to enforce the K
4.
Unjust enrichment of third party at expense of P due to speculation by third party a.
If the ratification didn’t go back to time of offer and acceptance and the A was acting beyond actual but with ostensible authority, the third party could speculate. If before the
P ratified the K it turned out to be unfavorable to the third party, it could revoke its offer or acceptance b.
Here, potential upside gain, no downside risk c.
Ex. Sale of goods by 3P to P – price of goods goes down, the 3P revokes the offer on the basis of ostensible authority d.
So part way through, the 3P can ratify which operates back in time before their attempt to revoke
5.
Cures minor defects in the grant of authority a.
Said to reduce litigation over the scope of actual and ostensible authority
Undisclosed Principal

Agency not disclosed, and the 3P thinks entering K with the A (not the P)

The general principle is that the undisclosed principle can disclose the agency relationship and sue the third party on a contract entered into by the A

EXCEPTION – doesn’t apply when the third party was looking to the A alone to perform the K.
Objective test: o The third party will be considered to have been looking to A to perform if: o 1. The terms of the K expressly require that only the A performs the terms of the K agreed to by the agent OR o 2. Circumstances indicate that the 3P clearly intended to contract with the A alone/would not have contracted with the P

Must be corroborating circumstances to prove this is true, cant just accept that if the 3P says it wouldn’t have done it that it wouldn’t
 Example Said v. Butt – there was history between them, the P got banned from the theatre, got A to buy the ticket for him, and the court held that clearly there
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was no K here because it was clear the theatre never would have contracted with him

There are reciprocal rights/protections for the third party o Can sue the P when learn of the agency relationship o Can still sue the agent as a party to the K o In an action by the P against the third party, the third party can use any rights the third P would have against the A and can use any defence that the third party would have had against the A o Ex. Paid $4000 to agent, principal suing for $10,000 – set off the $4000 and just owe principal the $6000 o When sued can use defenses of duress, mistake, or misrepresentation, because these are defenses the 3P might have against the A
Policy Reasons for Law of Undisclosed Principals
1.
Mutual Benefit – if the 3P wasn’t looking to the A to perform the K, then the 3P is still getting the expected benefit of the K when the P performs it
2.
Potential Unjust Enrichment of Third party – P may think she has a binding K with the 3P and proceed to perform the K a.
If the 3P avoids performance of his part on the basis the agency relationship was undisclosed, then the 3P would be unjustly enriched at expense of P
3.
Potential unjust enrichment of the P a.
The 3P can sue the P on the K b.
For example, if the 3P delivers the goods to the A and the A passes the goods on to the undisclosed P. If the P then refuses to pay for them, and the A doesn’t pay, the 3P can sue the P
Liability of P for Torts Committed by Agent
A principal is said to be liable for a tort committed by the principal’s agent if the agent committed the tort while acting within the scope of his or her authority .

Authority is vague – its broader than actual authority

The A just has to be doing the kinds of things that the A would normally do in carrying on her mandate (otherwise difficulties would arise from a P simply saying that he did not and never would authorize an A to commit a tort (DUH!))
Lloyd v. Grace, Smith & Co. (1912)
Facts : A clerk employed at the law firm Grace defrauded a client, Lloyd of her sole remaining assets.
Mr. Sandles, the employee, was in charge of the firm’s conveyancing, and did so unsupervised. He convinced her to sell the cottages and call in the mortgage. He left the room, came back with 2 documents for her to sign. She signed them without reading them over, and it turned out that they were in fact a conveyance to Mr. Sandles himself. He mortgaged them for a bank loan and used the funds to pay off personal debts. Lloyd them sued Smith, the lawyer principal.
Issue : Might be argues that principals like Mr. S don’t give their agents authority to commit frauds.
Decision
: “So narrow a sense would have the effect of enabling principals largely to avail themselves of the frauds of their agents, would be opposed as much to justice as to authority”.
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
From Barwick – “it is true the (master) has not authorized the particular act, but he has put the agent in his place to do that class of acts, and must be answerable for the manner in which that agents has conducted himself in doing the business”

The clerk had authority to receive deeds and carry through sales and conveyances, and the fraud occurred in doing that what he had delegated power and capacity to do

Also confirmed that the P does not have to benefit from the A’s fraud, nor does the A have to intend to benefit the P, in order for the P to be liable
Ernst & Young v. Falconi (1994, Ontario)
Addresses same issue in context of partnership. Partners are agents for each other, liable for the others tortuous conduct.
Facts : Falconi lawyer for KFA, pled guilt to charge under Bankruptcy Act for assisting persons making fraudulent dispositions of their property to avoid paying creditors. His partner had no idea, but the transactions were all done using the legal services of KFA (preparation of documents, documents transferring title, etc).
Issue : Is his partner, Klein also liable? Klien argued that the acts of Falconi could not be considered within the ordinary scope of business of the law firm.
Decision : Judgment against Klien

The court need not find that it is within the ordinary course of business of a law firm for a partner to conspire

Sufficient if that partner used the facilities to perform services normally performed by a law firm in carrying out the transactions as a result of which the creditors of the firm’s clients suffered loss

The activities of Falconi were normal lawyer-like activities – he prepared docs, transferred deeds, prepared corporate minutes, etc – all done using the support staff, trust account, letter head

The fact that the actions were for improper purposes does not take them out of the ordinary course of business of the law firm in that they are the acts normally performed when carrying on its usual business

SO: Principle is the same, partners are agents for each other and are liable for the torts of their fellow partners committed by those partners within the scope of their authority
Policy Reasons for making P liable
1.
Deterrence / Least Cost Avoidance a.
Gives the P incentive to take steps to avoid the harm-causing activity b.
With least cost avoidance, sometimes its possible both persons could have taken steps to avoid the harm – so impose the costs on the person who could have avoided the harm, at least cost c.
For example, in Lloyd v. Grace , Smith & Co .
Smith should have been more careful about who he hired for Mr. Sandles’ position, more carefully monitored the position, and dismissed him when the early signs of fraud occurred d.
The client should have also taken steps – like reading the document, although this isn’t particularly reasonable in the context of a lawyer’s office where it is understood the lawyers are there to look after their clients
2.
Allocation of the loss to the activity causing the loss
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a.
It will result in an increase in the price of the goods or services to cover for the added cost of harm prevention b.
Price will then more closely reflect the full cost to society of the particular goods or services and demand for the goods or services should adjust in response to the increased price c.
In Lloyd , the cost of law firms exercising better control over their clerks and the cost of compensating victims who suffer losses should come to be reflected in the prices of legal services
3.
Concern for compensation of the victim a.
Judge may have a P that the judge feels is deserving of compensation b.
The D might be the only one with a source for compensation c.
In Lloyd , no question that the little old lady would have been in a horrible position if the court did nothing to help her, as the cottages were her only remaining possessions.
Sandles had debt, no resources to pay, but his principal, who was in a well paying profession and could have obtained insurance, did.
4.
Other – specific to Lloyd , Accessibility of Legal Services a.
Important that people feel comfortable seeking out legal advice b.
Wont feel comfortable if they get screwed by their lawyers office and get no compensation
Key Elements:

Can form a SP simply by starting to do business (by yourself)

The sole proprietor is the only equity investor

The SP is ultimate decision maker

NOT a legally recognized separate entity o Assets owned directly by sole proprietor o Sole proprietor enters K, and is liable for them o Also liable for torts committed in carrying on the business, because she will have been personally involved, or vicariously liable for agents and employees

Personally liable – creditors can come after both business and personal assets o This works both ways – people who have claims arising out of conduct of business can get assets of business and personal assets to satisfy the claim o In addition, if people have claims arising out of sole proprietor’s activities outside the business, can go after personal AND business assets too

The SP might be able to negotiate limited liability in individual transactions (ie, borrows from creditors and in the agreement it says, can’t touch my personal assets)
Formation

One simply starts carrying on the business

Comply with licensing requirements that may exist (fed, prov, and munic) for carrying on particular types of businesses

Possible need to register name of business
Business Name Registration
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 One can carry on a business as a SP in one’s own name without having to register
 Must register name if using other than one’s own name, or a name indicating a plurality of persons

In BC, this requirement is found in s. 88 of the Partnership Act o States that the name must be filed with the registrar IF:

1. It is a business of trading, manufacturing or mining
 this phrase is not clear/defined

2. It is not a partnership

Separate part of the act deals with partnerships and their registration, although both end up in the same registry
 3. The business name is not the sole proprietor’s own name or the business name consists of a phrase indicating a plurality of persons
 ex. Smith and Sons (this would confuse someone into thinking it was a partnership)
 s. 89 of Partnership Act – registrar is NOT TO REGISTER the name IF it RESEMBLES the name of a corporation in BC, or if it is likely to confuse or mislead UNLESS o The corporation consents in writing OR the business name was used before the corporation first used its name o This is a curious provision, given it says nothing about two sole proprietorships having the same name – likely to be rectified soon

S. 90 of the Partnership Act – requires the registrar to maintain a register showing the business names on the left side with the names of the persons associated with the business on the right side

Purposes of the Registry : o May help track down who is behind a particular business

Useful for creditors to identify the sole proprietor for credit check purposes

Useful for a person wanting to pursue a legal claim that has arisen out of dealings with the business o Avoid deception of a name indicating a plurality of persons o Allow persons starting a business to avoid a passing off claim against them because they have used a business name that has been used by another person
Funding Sole Proprietorship
Sources of Funds:

Investment by SP

Funds borrowed from one or more lenders – lenders are usually banks o To avoid personal liability, SP might try to get a no-recourse loan meaning liability is limited to business assets o Although more likely that they will want to impose constraints on the business

Trade Credit – buys goods now, pays later

NOTE – all funds other than the SP’s investment could be considered “securities” and thus have to follow provincial securities regulation
Management of Sole Proprietorship

Sole Proprietor has ultimate control over decisions

May delegate some authority to agents or employees
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
So while it starts simple, could get complex – grow to be large, have hierarchy of agents and employees that are managed by several managers, with the apex of the hierarchy being the sole proprietor

As earlier stated, creditors may impost constraints on SP’s control o Want to control degree of risk their investment will be exposed to o Don’t want them to gamble the funds they are loaned on risky business ventures that have a high potential for the SP but huge downside risk for the creditor o Loss of control by the SP is a trade off – the SP gets necessary funds, and the lender will keep the interest rate on the borrowed funds down
Dissolution
The sole proprietor simply stops carrying on the business . No requirement to register a sole proprietorship (other than possibly the business name) and so no requirement to register its dissolution.

SP must eventually pay off the debts (or be petitioned into bankruptcy) but once the assets are sold and the debts paid off, the SP keeps what remains
Sole Proprietorship vs. Corporation
Advantages:
1.
SP is easy to form and very easy to dissolve
2.
Tax advantages of SP (often primary reason for choosing a particular form of business association) a.
Profits in SP are taxed directly in the hands of the SP b.
Income Tax Act requires the tax payer to add up their incomes from various sources and deduct losses from various sources c.
SP taxpayer can deduct losses from business against income from other sources
(business, property, employment) i.
May not be planning on losses, but important to remember lots of businesses incur losses in the start up phase d.
Tax Timing – General principle of tax saving is that it is better to pay a tax later than sooner since you can earn income on the amounts no paid – if the person carries on the business as a SP the person can use the losses of the business immediately against other income to reduce their taxes
3.
In contrast, tax disadvantages for corporation a.
Corporations treated by Income Tax Act as a separate person, so it also adds up its income and can deduct its losses. BUT the shareholders cannot deduct business losses from their other income because the business losses are not their losses – they are the corporation’s losses b.
Double taxation – if business does make a profit it will be taxed in the hands of the corporation as a separate tax payer, and then when the profits paid to shareholder, the shareholder will also pay tax on the profit
Disadvantages
1.
Sole proprietorship has no limited liability a.
Although this may not be so bad, given that when you incorporate the lenders will often still ask you to be personally liable/waive limited for leasing, getting loans
2.
Corporation may have a tax advantage if a small business – may be able to claim small business deduction to lower its tax rate
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a.
Thus, at some point when the SP starts to turn a profit, may make sense to incorporate
Involves more than one equity investor – commonly used business association
A partnership occurs when two or more persons carry on a business with a view to profit.
Origins

Comes from the C/L courts as an extension of contract law and agency

In England, codified in 1890, and virtually copied word for word in BC

The common law and equity origins of partnership are still relevant because the partnership act preserves the rules of equity and common law except to the extent they are inconsistent with the
Act (s. 91 of the Partnership Act)
Uses of Partnership
1.
Professionals a.
Provincial legislation used to prevent professionals from carrying on business as a corporation, so they used partnerships b.
Now, it is common for them to use LLPs
2.
Joint Ventures a.
Two or more corps might engage in a joint venture, and one way for them to do so is by a partnership b.
Corporations = people, so 2 or more together can be a partnership c.
Not uncommon choice in this context because it has a flow through tax feature
3.
Tax Reasons a.
Potential tax advantages for sole proprietorships may also apply to partnerships because the Income Tax Act doesn’t treat it as a separate legal entity b.
A partner can use his/its share of the losses against his/its other sources of income
4.
Default a.
People might be in partnership and not even know it – no formalities to formation
Advantages of Partnership
1.
Corporate form of association has often not been available for several professional businesses
2.
Easy to form
3.
Very flexible, whereas corporations require compliance with lots of mandatory statutory requirements
4.
Tax advantages
Disadvantages
1.
Partners are personally liable for K’s entered into
Formation
General partnerships = Part 2 of the Act
Limited partnerships = Part 3 of the Act
There are no formal steps to create a general partnership

Just start carrying on business with another person with a view to profit

Although generally good practice to write up and sign a partnership agreement
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
THERE IS a registration requirement for general partnerships, although a general partnership can exist without ever complying with the registration requirement o Consequences for failing to register
 Offence so fine
 Even if haven’t registered, legal actions can still be brought against all or any one of the partners

S. 81 of Partnership Act – persons in partnership for trading, manufacturing, mining must file registration statement with registrar o This must happen within 3 months after formation o Failure may result in fine, and partners become jointly and severally liable for debts – not just jointly liable o If J & S – the P’s can sue each one separately and individually – if just jointly, the P is barred from suing other partners if already sued one

S. 90 – the Registrar keeps an index showing the name of the partnerships registered along with names of persons who are partners

S. 83 – if change or alteration in the membership of the firm, new registration statement must be filed
Three main situations when the existence of partnership can be significant
1.
What is the relationship between 2 or more people? Is it partnership? a.
The Partnership Act sets out a default agreement for people acting as partners, so need to know if its appropriate to apply those provisions to control their agreement
2.
Liability of a person to third parties on the basis of acts of fellow partners – remember agency!
3.
Tax reasons
S. 2 of the Partnership Act
A Partnership is the relation that subsists between persons carrying on business in common with a view of profit
4 KEY ELEMENTS
1.
Persons

Defined in s. 29 of the Interpretation Act = corporation , partnership or party , and the personal or other legal representatives of a person to whom the context can apply according to law
2.
Carrying on business

Business takes on its ordinary meaning – “a trade, profession, a person’s usual occupation; buying and selling, trade; a commercial firm; a shop”
3.
In common

Must be doing business together in some way

S. 4 provides guidelines
4.
With a view of profit

A non-profit association not treated as a partnership under the Act
 It’s a VIEW of profit – no profits actually have to be made (
Backman )
Backman v. Canada (2001, SCC)
Facts : A limited partnership established under the law of Texas – The Commons at Turtle Creek. LP investors were Americans. Acquired land in Dallas, built apartment building on it. Later, the cost of land far exceeded its value. The appellant and 38 other Canadiands sought to take advantage of the loss
18

and deduct it from their Canadian income taxes. They attempted to do this by buying out the interest of the Americans, then selling it right back to the Americans to realize the capital loss.
Issue : They claimed partnership, so that they could deduct their individual losses from their personal incomes. Was it actually a partnership?
Decision : Considered the elemends of partnership, and decided it was NOT a partnership

Carrying on a business – discussed dictionary definition, noted that you don’t have to carry one on for a long period of time, can form a partnership for a single transaction o Gordon v. The Queen
 Carrying on a business involves “the occupation of time, attention and labor, the incurring of liabilities to other purposes, and the purpose of livelihood or profit”

In common
– the authority of any partner to bind the partnership is relevant o But just because management of a partnership rests with one partner doesn’t mean that the business was not carried on in common o Also important to consider if they held themselves out to third parties as partners o Consider the contribution of skill, knowledge or assets to a common undertaking, a joint property interest, the sharing of profits and losses, filing of income tax returns as a partnership, joint bank accounts

View of Profit o The tax motivation will not detract from question of partnership – it is a question of intention o Profit shouldn’t be the overriding intention – sufficient if there is ancillary profit-making purpose o Don’t need a net gain over time – can incur losses o Need to weigh relevant factors in the surrounding circumstances
Result :

The apartment never operated

Just acquire and sold

The Canadians never managed the property
 The investments were just “window dressing” in an attempt to make it look like a partnership for tax purposes, but no real expectation of or view of proft
*****s. 3 of the Partnership Act

Where the business is carried on through a corporation then the particular corporate statute applies and the Partnership Act DOES NOT APPLY
 This doesn’t mean a corporation can’t be a partner – a corporation is a person, so can be in a partnership

But the corporation itself is not a partnership – shareholders are not partners
The Legal Status of Partnership
Re Thorne v. New Brunswick (1962, SCC)
Partners can’t be employees
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Facts : Thorne and Robichaud were partners in a tree-felling and sawmilling operation. R did felling, T did sawmilling. T injured, sought worker’s compensation. Board refused, saying that T was not a worker., he was a partner.
Issue : Workers Compensation Act defines “workman” as an “employee”. The board argued that partnership was not a legally recognized entity and that meant an employment K in the context of the
T-R business had to be a contract between an employee and T and R as co-employers. For T to be an employee, would have had to make a K with himself. Which is impossible – it takes two to make a contract
Decision : A partnership Not recognized as legally separate

T was NOT an employee but rather a partner, no compensation
Consequences of Partnerships not being separate legal entities
1.
Each partner liable to the full extent of his personal assets
2.
Partners cant be employees of partnership business (note, shareholders CAN be employees of corporation)
3.
Partner cannot be a creditor of the partnership – you can’t enter into a K with yourself
4.
By Rule 7 of the Court Rules, can sue in the name of he partnership firm and serve to the place of business
5.
For income tax purposes – income is allocated between the partners and they are taxed individually – its not the partnership that is taxed
The Partnership Agreement
The PA sets out the default rules for partners (ss. 21-34) that govern the relationship between the partners if they have not either expressly or implicitly agreed otherwise

These rules based on assumption of equality with respect to capital contributions, rights to participate in management, share in profts
Partnership Act s. 21 allows for variation to the default rules

Consent by all the partners – either express or implied from a course of dealing

Ability of partners to create heir own set of rules = very flexible, key advantage of ptshp

Useful to have comprehensive partnership agreement that puts in provisions they want to change as well as those consistent with default position (only have to look at written to determine rights)
The Default Position:
1.
Partnership Property

S. 23(1) – Partnership property must be held and applied in accordance with partnership agreement

S. 6 – Partnership property means property brought into the partnership, property acquired on account of the firm, or property acquired for the purposes of and in the course of the partnership

S. 23(2) – Property that belongs to partnership but in name of one individual = held in trust for the partnership

S. 24 – Property bought with money belonging to the firm is partnership property
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2.
Day to Day running of the business – set out in S. 27
 Sets out how to run business, “subject to agreement express or implied by partners”

27(a) – Partners share squally in capital, profits, and losses o Miles v. Clark – Photographer (P) and person F set up business together under oral agreement the F bought lots of equipment for the P to use. Dispute arose, P sued F for half the assets based on 27(a) o Decision: 27(a) didn’t apply – inconsistent with oral agreement

27(b) – Firm must indemnify every partner for liabilities in the ordinary and proper conduct of the business (similar to agency, where P indemnifies the A)

27(c) – P who makes advance of capital over contribution agreed on entitled to interest

27(d) – A partner not entitled to interest on the capital subscribed by the partner

27(e) – Every partner may take part in managements of business

27(f) – Partners don’t get remuneration for working in the business

27(g) – Can’t add new partners without consent of all the partners

27(h) – Decisions on ordinary business matters are made by majority of partners o this doesn’t apply to changes in the NATURE of the partnership

27(i) – Partnership books kept at principal place of business, every partner has access
3.
No Majority of the partners can expel another partner

S. 28 – can’t expel unless a power to do so has been conferred by express agreement
 This is a default rule that can’t be altered by implication
4.
Any partner can dissolve the partnership at ANY TIME – s. 29 and 35(c)
Assignment of Partnership Interest
S. 34 – A Partnership interest can be assigned, but this only means an assignee of a partner is entitled to a share of the profits and a share of the partnership assets on dissolution – does not mean the assignee becomes a partner, so has no say in management or administration

Rationale – don’t want to be in business with a partner you haven’t chosen
Fiduciary Duties Between Partners
Must have duties b/w partners because they are treated as agents for each other.
1.
General Fiduciary Duty a.
S. 22 – “a partner must act with the utmost fairness and good faith towards the other members of the firm in the business of the firm”
2.
Specific Fiduciary Duties a.
S. 31 – Partners bound to render accounts and full info of all things affecting the partnership b.
S. 32 (1) – Must account for any benefits derived without consent of other partners from any transaction concerning the partnership, or form any use by the partner of the partnership property, name, or business connection i.
S. 32(2) – this applies to transactions made after partnership dissolved by death of partner before the affairs are wound up c.
S. 33 – Must account for profits made engaging in competing businesses
Rochweg v. Truster (2002, OCA)
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Facts : R was a chartered accountant and a partner of RTZ. Left firm and partnership dissolved (July
1996). R became director of Teklogix Inc (July 1995) – clients of RTZ – entitled to shares and stock options – earned fee for being director, accounted for fee to RTZ but never accounded for shares/stock options. Note – Tecklogix had been his client since 1967 so he was the primary contact between them and RTZ.
Issues : Were the other partners of RTX entitled to an account for the shares and stock options?
Decision : Note, this is Ont decision, so this story is told using the appropriate BC provisions

NO written partnership agreement – so governed by the act, and there has been no change to s.
31-33

An obligation to account arises under s. 32 without proof of a competing activity o Versus under s. 33 where need proof of competition

At all times R was a partner of RTZ, he had duties to his partners

He did not have a conflict of interest giving rise to account under s. 33

BUT the shares and stock options were compensatory benefits in a matter affecting and concerning the partnership which he had an obligation to disclose under s. 31, and for which he must account under s. 32(1)
McKnight v. Hutchinson (2002, BCSC)
Facts : Law firm partnership that ended when M learned H had received earnings from part ownership in a private company. They had a partnership agreement that said in article 2.8 they were allowed to conduct business other than law, and get paid for it, if they told the other and as long as the activities wouldn’t compromise the practice of law within the partnership.
Decision : Article 2. 8 reinforced the duty to disclose in s. 31 of the Act. There was no notice given by
H about his matters. In fact, some of them were even law firm related services. It is possible they also put him in a conflict of interest.
Funding

Similar to SP – usually some trade credit, bank loan

Partners are the equity investors – maybe cash contributions, property or services

Usually the partners share profits in proportion to relative contributions, but not necessarily – if nothing said, default of 27(a) to share equally
Dissolution
By Act of the Partners
1.
35(a): set a fixed term for the partnership – at the expiry, partnership ends unless the partners agree otherwise
2.
35(b): agree to dissolve at end of a particular venture
3.
29, 35(c): If no a or b, the partnership may be dissolved by notice of intention to dissolve and the dissolution will take effect from the date of the notice or the date specified in the notice
Death, Bankruptcy or Dissolution of a partner
1.
Dissolved automatically in any of these situations
2.
Why? On death, no longer the same partnership, and upon bankruptcy, don’t want to have to cover losses of your partner
22

3.
Remaining partners can re-constitute
4.
Is a term often expressly varied by agreement so that death, bankruptcy or dissolution does not result in automatic end to partnership a.
Often frustrating to have to go through process all over again b.
BC Partnership Act s. 36 reflects this – default provision - when there are two or more partners, these things only dissolve the partnership with the deceased, bankrupt or dissolved partner and the remaining partners, so that the remaining partners stay in partnership
It is frequent for third parties, like creditors or contractors, to argue that particular persons are liable on the basis that they are partners
SECTIONS 7-11 of PARTNERSHIP ACT APPLY TO VOLUNTARY RELATIONSHIPS
BETWEEN PARTNERS AND THIRD PARTIES
Section 7 – apparent authority of partners

(1) Every partner is an agent of the firm and other partners for the purposes of the partnership business

(2) Where partner does act for “carrying on in the usually way of business of the kind carried on by the firm” it binds the firm and partners unless: o partner had no authority to act for firm in the particular matter; and o third party either knew the person had no authority or did not know or believe the person was a partner

Parallels ostensible authority – reliance of the 3P must be reasonable
Section 8 – actual authority of agent or partner

An act or instrument (document);

Relating to the business of the firm;

Done/executed in the firm name , or in any manner showing an intent to bind the firm;

By any person authorized to do so (whether partner or not)
 is binding on the firm and ALL the partners

Does not limit actual authority – appears to cover both actual and ostensible
Section 9 – If no ostensible authority, partners not bound unless particular partner had actual authority

If a partner pledges credit of the firm and does so for a purpose not connected with the firm’s ordinary course of business, then the firm not bound unless the person was specially authorized by the other partners o No way the 3P has reason to believe the person has authority
Section 10 – Third Party notice of restriction on Authority of Partner
 3P has notice of restriction of power of partner, partner’s actions in contravention of restriction don’t bind firm
Section 11 – Joint Liability for debts of partnership – all partners jointly liable as long as partner

On death, estate is severally liable subject to prior payment of partner’s separate debts
Section 19 – Liability of New partners and Retired Partners

(1) Person who joins existing partnership not liable to creditors of debts that arose before

(2) Person does not cease to be a party to K’s just because have left partnership
23


(3) If creditor agrees to relieve retiring partner from further liability, agreement binding
Liability of Partners in Tort
Section 12 – Firm liable for wrongful acts or omissions with loss/injury caused to any person where a partner acted with the authority of co-partners OR acted in the ordinary course of business
Section 14 – Liability under s. 12 is joint and several
Ernst & Young v. Falconi
Demonstrates Scope of s. 12
Facts – above – lawyer helping bankrupt peeps get rid of their props.
Issue
: Klien, Falconi’s partner, argued that the acts of F could not be considered in ordinary scope of business of the law firm.
Decision : He was doing things like writing documents, writing title transfers, using the firms letterhead, support staff, etc.
 “It is sufficient if the partner used the facilities of the law firm to perform services normally performed by a law firm”

Not necessary for a partner to conspire with others to defeat creditors
When a partner is found liable, he is liable for the full amount . Tort victims contracting with the partnership business can claim full compensation from any one or more of the partners.

This is independent of a right to seek indemnification/contribution from other partners

If a partner has to pay, can seek to have fellow partners contribute according to terms of the partnership agreement

If person sues A, A is 100% liable for full amount

Then up to partner to seek indemnification from partners B, C, D
More on the existence of partnership (context of 3P relationships)
Section 4 – guidance to carrying on a business “in common”

(a) Common ownership of property does not in itself make co-owners partners

If other aspects exist too, then might be considered (ie share profits, have some involvement in mgmt of property)

Finding of co-ownership vs. partnership has significant implications o Co-owners are not agents for each other (partners are) o Co-owners can deal with their own interests in the property w/out consent of the others

Partners cant transfer interest w/o consent on others

(b ) Sharing of gross returns (gross returns are revenues before the deduction of expenses) does not of itself create a partnership (ex. Traveling play company performing in theatre operated by theatre owner) o Not carrying on business in common o Just a presumption – something more may indicate partnership

(c) Creates an assumption – the receipt by a person of a share of the profits on the business is proof in the absence of evidence to the contrary that he is a partner in the business o Cox v. Hickman clarifies that this is a rebuttable presumption of partnership
24

o Qualifications under 4(c)

Receipt of a share or payment contingent on or varying with the profits does not of itself make a person a partner
 ad agency and client example

4(c)(i)- Payment of a debt or liquidated amount by installments out of profits does not of itself make a partner (creditor temporarily taking % of profits)

If creditor presses and sues for assets, might cause bankruptcy so this is an arrangement to ensure business stays open

4(c)(ii) - A contract for remuneration of an employee or agent by a share of the profits does not of itself make a person a partner (ex. Articling student gets Xmas bonus set at a % of yearly profits)

4(c)(iii) - Spouse of a child of a deceased partner who receives an annuity out of the profits is not a partner merely because of the receipt of profits

4(c)(iv) - Profit sharing loans – money advanced by loan to person engaging in business on a K between the person and lender, where the K is in writing and signed by or on behalf of all the parties, and where the lender gets a rate of interest varying with profits does not of itself make the lender a partner

CONTROVERSIAL – because makes it possible to have a person with an investment that is pretty much a pure equity claim and yet the person might not be considered a partner

Presumably the difference is that when the firm ends, they would only get investment back, whereas partners entitled to what’s left after liabilities paid

But would get money along with other creditors, before partners get anything back

This was introduced in England by Bovill’s Act

Justifications: Mechanism for funding businesses in temporary difficult positions,

Ex. A struggling SP (motel) will have a hard time attracting new equity investors (their funds could be completely lost if business doesn’t pick up) or fixed rate investors (if it does turn around, all these investors get back is principle plus fixed rate, nothing more)
 
S.4(c)(iv) allows investors to share in the upside gain through a share in the profits while allowing them a degree of downside risk protection in that they don’t become partners and liable for all other debts
 Don’t want to force the company into bankruptcy, and better for existing creditors that it not do so

Example – Martin v. Peyton

4(c)(v) – A person receiving payment for goodwill out of profits is not a partner merely because of receipt of profits
 “goodwill” = value of business that is not fully reflected in the market value of individual assets of a business

Buyer agrees to pay addition amount for goodwill out of subsequent profits after only paying face value for business o Section 16 – a person who represents himself to be a partner (orally, written, conduct) or who knowingly allows himself to be represented as a partner, will be liable to anyone who had given credit on the faith of the representation

Ex. Person w/ good credit allows person to use his name to get credit
25

Pooley v. Driver and Martin v. Peyton
Must weight the factors that are consistent with partnership with those than aren’t to decide if a partnership exists
Policy and Underlying Values
1.
Direct Reasonable reliance on a known participant in the business a.
See below for A.E. Lepage v. Kamex, Cox v. Hickman, Pooley v. Driver b.
3p’s may reasonable assume that people involved in management are in business together, and reasonable rely they are jointly liable c.
Hence , those who act in common or represent themselves as partners, are generally considered to be partners d.
This rationale alone not sufficient, as persons are held to be partners even if are
“ dormant partners
” with no involvement in management
2.
Indirect Reasonable reliance on a person not known to the third party a.
See below for Cox v. Hickman, Pooley v. Driver b.
Parties may rely on “silent partners” c.
Highly unlikely a business is all or almost all debt financed (lenders wouldn’t go for it) d.
If person sees a business has lots of assets, can reasonable assume that there are persons who have substantial assets in the business and are personally liable on it e.
So, third party pay advance credit to business on the assumption there is someone who has funds to pay the debt
3.
Avoid unjust enrichment a.
See below for A.E. Lepage v. Kamex, Cox v. Hickman, Pooley v. Driver b.
A person sharing in the profits of the business is getting the benefit of the credit advanced i.
Say profit shared between 2. Person 1 then becomes insolvent, and when supplier comes looking to get the money, if the other person can say they are not a partner, then they get a benefit at the expense of the supplier c.
So, those sharing in profits are generally considered to be partners d.
Also, share in gross returns alone does not mean partner i.
if creditor priced goods or services and set terms of credit based on the persons in the business he was aware of, then being able to make a claim against a person he was not aware of is itself a windfall
4.
Least cost avoidance a.
See below for A.E. Lepage v. Kamex, Cox v. Hickman, Pooley v. Driver b.
Ask, who can best assess the risks , and who can best control the risks c.
Those involved in the business on some level of management or have a share of the profits are usually in a better position to assess the risk and control for it than most 3P creditors d.
If put the risk of business failure on the persons involved and sharing profits lowers the overall cost of credit, because they know how to assess the risk e.
Creditors will charge more if they are bearing the risk
5.
Other concerns a.
“
Distributional concerns
” – may be inconsistent with other policy concerns and override them, but this is unique by case b.
For example, in Cox v. Hickman , court wanted to avoid discouraging useful arrangements being set up to help a struggling business
26

Case Law on Partnership
Notes:
 If it’s a dispute between 2 people about the terms of their agreement, if the K says they are not partners, court will agree
 But if it’s a dispute with a 3P, the court will WEIGH the factors
A.E. Lepage v. Kamex Developments (1977)
Must weight the factors – what looks like partnership vs. what doesn’t
Facts : Group of persons form a syndicate to buy a property. Kamex was incorporated to hold the property in trust on their behalf. Persons in group entered an agreement (profits/expenses to be shared in proportion to their interest, selling needed majority vote, must offer your interest to other co-owners before selling it). Parties met monthly to discuss operation and sale of the property. March (co-owner) listed property exclusively with A.E. LePage (should have been open listing) when they approached him. Sold by another company but LePage wanted commission based on exclusivity. Trustee for the syndicate refused to pay.
Issue : A.E. LePage sued, saying it was a partnership and that M’s acts as a partner were binding.
Decision : Arrangement was an ownership in common, NOT a partnership

Inconsistent w/ partnership for co-owners to have ability to deal w/ individual property interests

Right of first refusal (common in partnership) not inconsistent with the right of the members to deal with their own interests in the property

Also, they treated their interests separately for tax purposes , not as a partnership

Some things did look like partnership – sharing of deficiencies, requirement of majority vote
Policy:

Reliance – no indication M had been held out as having authority and not clear LePage relied on the other members as partners (he should have gone to Kamex)

Unjust enrichment – Lepage would have been paid even though didn’t actually sell the property

Least Cost Avoidance – Syndicate members had limited control over management – LePage could have checked with officers of Kamex before approaching March
Cox v. Hickman (1860, HL)
Before partnership Act – this decision is codified in s. 4(c)(i)
Facts : Iron business owned by Smith $ Sons operated under name Stanton Iron Works. Developed financial problems. Instead of forcing bankruptcy, creditors agreed to an arrangement whereby Smith
& Sons would transfer assets of business to trustees, who would run the business. Creditors had rights under trust – access to books, power to elect/replace trustees, and make rules for conduct of business.
Someone supplied goods to the business on credit while the trustee was operating the business under the arrangement. Invoice marked accepted by agents for trustees, which converted the invoice into a negotiable instrument. Endorsed by Hickman who paid a sum of money for the endorsement. Invoice not paid, Hickman sued on it.
27

Issue : Business insolvent – who could pay H? He argues the creditors were partners because they were sharing profits, so they could be liable to him.
Decision : Close 8-7 NOT partners

Sharing of profits is strong evidence of partnership – but it is a rebuttable presumption o Overrules Grace v. Smith

Dormant partners are liable for the acts of other partners in carrying on the business

The TEST of whether a partnership exists is a question of whether the persons carrying on the business were acting as agents of the person alleged to be a partner
Policy :

Reliance – direct reliance can’t be the only concern – H probably didn’t even know who Cox was since they never acted in the capacity of trustees and so never conducted the business o Can’t have directly relied on the creditors as partners o MAY have indirectly relied – he might have seen substantial assets in the business and assumed that there were investors who would be personally liable

Unjust Enrichment – could have been factor since the creditors benefited from the goods at the expense of H – clearly not an overriding factor given H lose

Least Cost Avoidance – this factor also seems to favor H – the creditors probably didn’t carefully assess the risk of business failure, and although they would have had minimal control over the business, it’s arguable more than H

Promoting Useful Arrangements – if case went against creditors, would have discouraged future C’s to take on similar arrangements
Pooley v. Driver (1876)
Deals w/ provisions similar to 4(c)(iv). Weigh factors that indicate partnership vs. those that don’t
Just because parties say in an agreement that they were not to be considered partners is not determinative of whether they were partners!
Facts : B and H enter partnership agreement for business of making grease, pitch, manure. Capital divided into 60 parts, profits distributed in accordance with # of parts attributed to each person. B got
17, H got 23. Remaining 20 given to people who advanced funds. B and H didn’t actually invest any money, all funds came from lenders. Drivers advanced money to B and H, and this agreement was incorporated into the partnership agreement. Pooley held several bills owed by partnership, ended up suing the Drivers claiming they were partners. Drivers defended themselves using
Bovill’s Act.
Issue : Were the Drivers partners b/c they shared in the profits?
Decision : It is partnership
Weighed factors in favor vs. not of partnership
Factors that indicated partnership
1.
Had an interest in the capital of the partnership
2.
Ability of lenders to enforce partnership agreement looked like participation in and control of the business
3.
Having the return on the lender’s investment vary with contribution (uncommon for lenders)
4.
The loan agreement terminated in lender went bankrupt (uncommon for lenders)
5.
Term of loan agreement (14 years) was same as partnership agreement
Policy :
28

1.
Reliance – no direct reliance, because Pooley admitted he wasn’t aware of the connection of
Drivers to business – but of course may be indirect, like in Cox
2.
Unjust enrichment – Drivers would benefit from advance of goods on credit and a share of the profits
3.
Least Cost Avoidance a.
Evidence suggest the Drivers were in position to assess and control risk b.
Aware of capital structure of the business, would have known if it was able to pay debts c.
Once the loan agreement incorporated into partnership agreement, they had ability to enforce the terms and control selling, borrowing, dissolution, etc
4.
Broader Policy – didn’t want to allow this kind of relationship w/o partnership a.
Would give the Drivers limited liability that was ranked with creditors b.
Creditors would not be aware of the main contributions of capital to the business were made by persons who effectively had limited liability. Everyone would set up in business this way, to get the benefit of lower cost credit by having person dealing with the firm believe that the liability of the persons sharing the profits was not limited when in fact the investors sharing the profits would have limited liability. Eventually persons advancing credit would figure this out. They would charge higher amounts for credit and reverse the hypothetical preferred bargain the creditors and equity investors would probably have agreed on ahead of time is one in which the equity investors would bear the risk by agreeing to personal liability since they could control the risk at lower cost c.
Law deals with this by having Limited Liability structure – but must be explicit
Martin v. Peyton (1927 NYCA)
US case but shows the weighing of factors. An example of how a provision like 4(c)(iv) might be justified as a means to allow financing of a business that is experiencing some temporary financial difficulties.
Facts : Partnership KNK obtained loan of securities (5.2 million in marketable securities) from D’s
(firm PPF). D’s denied offer of partnership because of the poor financial state of the company (didn’t want to be personally liable if went under). Loan repayment provided on basis of share of the profits
Issue : Was PPF a partner or just a lender?
Decision : NOT partnership
 Reiterates that just b/c you say no partnership, it’s not conclusive
Factors inconsistent with partnership
1.
Securities were to be returned to PPF (once property contributed to partnership, becomes partnership property and not returned)
2.
Securities were partially secured by the partnership
3.
Loan kept separate from other assets of firm
4.
Securities were treated separate and D’s interest in them maintained (required consent to sell, paid interest, etc)
5.
PPF were to be paid all dividends and interest (usually partners would share in revenue)
6.
D’s could not initiate any action or bind the firm (no agency)
Factors Consistent
1.
Share of profits (but limited – 40% share to max of 500,000)
2.
D’s were kept advised of conduct of business, were consulted on important matters
3.
Could inspect the books, veto business
29

Policy :
1.
Reliance a.
Partnership business operated as it had in past, PPF unknown to third parties and so weren’t relied on directly b.
Possibility of indirect reliance
2.
Unjust enrichment – doesn’t appear on facts – would have been in they got a share of profits while others provided goods and services and lost out
3.
Least Cost Avoidance – PPF had some ability to assess and control risk – were putting up a
LOT of money, likely did careful assessment
4.
Other – likely, wanted to do this to provide a mechanism for funding businesses in temporary financial difficulties
Liability of Partners – old, new, retired
Liability of New partners

Partnership Act S. 19(1) A person who joins an existing firm in not liable to creditors for debts of partnership that arose before joining
Retired Partners and Past Liabilities

S. 19(2) once a person is a member of the firm the person does not cease to be a party to those contracts just because he or she has left the partnership. Partner who retired is not released from debts or obligations incurred before

19(3) A creditor can agree to relieve a retiring partner from further liability o Reliance on this probably requires agreement at the time the K creating the debt is entered into o In large partnerships, a creditor might be willing to do this because there is frequent turnover of partners
Retired Partners and NEW Liabilities
 When partner retires, 3P’s may not be aware the partner has retired and continue to rely on him as still being a partner

Under the PA therefore, a retiring partner can also be liable for debts of the partnership arising even after he has left , unless take CERTAIN STEPS TO AVOID: o S. 39(1) Persons dealing with a firm after the retirement of a partner can treat all
“apparent” members of the pre-retirement firm as partners until they have NOTICE of the change in the partnership

Apparent may mean lots of things – may be due to notoriety, use of persons’ name on sign and letterhead o S. 39(2) For persons who have not had prior dealings with the firm , the notice can be effected by way of a notice in the Gazette

Suggests there is something more for persons who have had prior dealings – held that they must have ACTUAL notice ( Dominion Sugar and Tower Cabinet ) o S. 39(3) A retired partner will not be liable to those who can be shown not to have known that the retired partner was a partner o S. 39 probably applied when partnership changes to a corporation also

S. 84(b) If fail to file new registration statement after retirement of partner, this is evidence the person continues to be a partner

Policy
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o Reliance – persons who had prior dealings with firm may rely on the retired partner still being a partner if don’t get notice o These sections put the onus on the retiring partner to take steps to protect against potential reliance. Once take the right steps, the onus shifts to the persons dealing with the firm
People who pretend to be partners

S. 16 a person who represents himself to be a partner or who knowingly allows himself to be represented as a partner, will be liable to anyone who has given credit relying on the faith of the representation
 This could apply even if there’s no partnership – example – a person w/ good credit lets SP use name in order to get credit – that person will be liable for the credit

Dominion Sugar v. Warrell – business called Worrell and Yates, Worrell leaves, but Yates doesn’t change name so he can still get credit
Subordination of Lenders for a Share of the Profits
The principle: Suppose a partnership owes money to a 3P. If that 3P can’t show a person is a “partner” and therefore personally liable for the debt, they might nevertheless be able to subordinate their claim to the 3P’s claim on insolvency of the partnership.
What is the basis for this? SECTION 5 OF THE PARTNERSHIP ACT
Section 5: If a.
a person to whom money is advanced by way of a loan on contract as mentioned in s. 4; OR b.
a buyer of goodwill in consideration of a share of the profits; AND either: c.
becomes insolvent d.
enters into an arrangement to pay creditors < 100 cents on the dollar; OR e.
dies in insolvent circumstances
Then the lender, or seller of goodwill, is not entitled to recover anything in respect of the loan or share of the profits until the claims of the other creditors of the borrower or buyer for valuable consideration in money or money’s worth have been satisfied .
Re Fort (1897, QB)
Written Contract NOT required
Facts : Schofield loaned money to F at interest rate of 5% plus half the profits of F’s business net of salary. Loan agreement NOT in writing. F failed to pay loan, S sued F. F’s defence was that he wasn’t liable on the loan because S was his partner.
Decision : Court didn’t accept, holding S wasn’t his partner.
 Then, F became bankrupt while S’s judgment debt remained unsatisfied
 S put in claim with F’s trustee but the trustee refused the claim on the basis that it was subordinated under provision 5 of the PA o S argued – b/c K not in writing, the loan didn’t fit into 5(a) o SUCKER! Court held s. 5 applies whether or not K in writing
Policy ?
Don’t want a partnership that doesn’t do well (who in fact intended to be partners) to say that the wealthier party’s investment was actually an oral loan. It would result in the wealthy party haven’t
31

limited liability and be able to share pro rata with other creditors in the remaining assets of the partnership business. Would defeat reliance by 3P’s dealing with the business
Canada Deposit Insurance Corp v. Canadian Commercial Bank (1992, SCC)
Facts : CCB having difficulties. Arrangement made b/w Alberta, fed gov, and several major banks to give loans to help it through. Part of loan agreement was the lenders got a right to share in the profits until the principal of the loan was paid in full along with interest. Bank didn’t recover, and the lenders sought to rank equally with the unsecured creditors of the bank.
Issues
: Did the arrangement fall under s. 4(c)(iv)? If it didn’t fall into that but fell into s. 4(c)(i), did s.
5 apply?
Decision:

4(c)(iv) is usually for situations where payment out of profits was for more than just repayment of the principal plus interest
 4(c)(iv) doesn’t apply where the share of profits is limited to repayment of the principal amount of the loan plus interest
 The arrangement fell under s. 4(c)(i). But s. 5 doesn’t apply. S. 5 refers to a contract of a type mentioned in s. 4 and s. 4(c)(i) DOESN’T refer to a contract
Policy of s. 5 is that one who shares the shares in the profits should also share in the risks.
In this case, they weren’t sharing profits over and above the repayment of principal – so why should they have to take the risks!
Sukloff v. A.H. Rushforth & Co (1964, SCC)
S. 5 DOES NOT apply to security interests
Facts : Complex – but initial loan made to S for 45,000 for 10% interest plus a 50% share in the profits.
S later obtained a security interest for 35,000 of this loan. S also later made an additional loan for 5,000 for 10% interest but no right to share in profits.
Issue : How did S rank relative to other unsecured creditors on the insolvency of the borrower?
Decision :

Ranked ahead of others to extent of security interest ($35,000)

Ranked with the unsecured creditors for the 5,000 plus interest, no profit sharing

Subordinated to them under s.5 for the 10,000 unsecured interest
Most provinces now have registration system for security interests under personal property legislation

If considering advancing credit, can check security interests granted by the potential debtor

Reliance on availability of assets would arguably not be reasonable since the existence of security interests can be checked in the registry
Joint and Joint and Several Liability
Joint Liability – more than one person may be liable on the same set of facts
32

-
If supplier succeeds in suing A, but A does not have enough assets, supplier can sue other partners
(b then C then D) until the debt is satisfied
-
Court time is consumed arguing same case against all partners separately
-
Conflicting results could put administration of justice into disrepute
Court solution: Force P to join all D’s who were liable on the same facts o if persons where “jointly” liable then if th P chose to proceed against just one (or less than all of them) it operated as a bar to proceeding against the others o If one (or less than all) were sued, the joint debtor had a right to an order of the court staying the proceedings until the other joint debtors were joined to the action
Several Liability – Persons are severally liable when they have all arguably caused the P’s loss but facts on which the allege cause is based are different for each defendant
D’s are severally/separately liable
-
Suing just one, does not operate as a bar to suing the others
-
No right to stay proceedings until others are joined
S.53 of the Law and Equity Act
-
S.53(1) if a party has demand recoverable against 2 or more persons jointly liable, it is sufficient that any of those persons is served with process, and an order may be obtained and execution issued against the person served even if others jointly liable may not have been served or sued or may not be within the jurisdiction of the court
-
S.53(2) the obtaining of an order against any one person jointly liable does not release any others jointly liable who have been sued in the proceeding, whether the others have been served with process or not
-
S.53(3) every person against whom an order has been obtained who has satisfied the order is entitled to demand and recover in the court contribution from any other person jointly liable with the person
Rule 7 of the Supreme Court Rules of Court
-
You can sue a partnership in the name of the firm
-
Service can be effected by leaving a copy of the document to be served with a person who was a partner at the time
Even if only served process on some of the partners, it probably wouldn’t be a bar to a subsequent proceeding against other partners either pursuant to s. 53(2) of the Law and Equity Act or pursuant to a court order for leave to issue execution (Rule 7(8))
Overall Effect of Rule 7 and S.53 of the Law and Equity Act - mitigates the significance of the distinction between joint and several liability
Why use this form of association?
-
Partnerships are not tax payers - flow through taxation
-
Corporate form has often not been available for several professional businesses
-
Easy to form
-
Flexible – very little that is mandatory
-
Corporate form has constraints
Disadvantage: partners are personally liable for K’s entered into in respect of the partnership and for torts
A limited partnership allows some of the partners to have limited liability but only if the partnership does business under a name that adds the words “Limited Partnership” as a suffix to name.
33

Big creditors make you pay higher rates for limited liability – so why do we have it?
Default in partnerships is personal liability
Under limited partnership, default is limited liability for limited partners
What is a limited partnership?

S. 50 one or more general partners, and one or more limited partners

S. 57, 63 – Liability of limited partners is limited to the amount the limited partner contributes or agrees to contribute to the limited partnership

Liability of general partners is NOT LIMITED

Formed by filing a certificate under s. 51 o ESSENTIAL to formation o **** not a limited partnership unless it is registered – it remains general**** o Doesn’t matter what the parties agreed to
Advantages
1.
Tax advantages – losses can flow through the partners (both general and limited) against their other sources of income. Limited partnerships are a common form of financing start up operations for this reason
2.
Flexibility – default partnership agreement from act can easily be changed
3.
Saves cost in comparison with non-recourse loans/contracts, since don’t have to negotiate limited liability separately with every creditor
Characteristics of LP’s that may protect 3Ps
Found in Partnership Act Part III – 7 provisions to protect
1.
S.53 – Calls for cautionary suffix by requiring name of LP must end with “Limited Partnership”
2.
S. 53(2) The surname of the limited partner must not appear in the name of the limited partnership a.
There are exceptions (like if name is same as a general partner) b.
53(4) If a limited partner’s surname appears in business name, no longer has limited liability
3.
S. 64 – A limited partner is not to take part in management of partnership
4.
S. 55 – A limited partner is not to contribute services to partnership business
5.
S. 51 – The certificate must state who the general partners are – allows 3P’s to assess credit worthiness of those who don’t have limited liability a.
Certificate must also state the contribution provided
, or to be provides, by LP’s b.
Can assist the 3P creditors in determining the amount of capital in the firm (although capital at onset of business might not saying anything about later on)
6.
S. 59 – no return of capital to partners (general or limited) is permitted if after the return of capital the partnership would be insolvent a.
This is the “no abandoning ship” provision – the partners who will know of the trouble sooner must stay with the creditors rather than taking all the life boats (assets) when they know the ship (business) is sinking
Cases on s. 64 – No management of the business for limited partners

Common structure to have corporation = general partner

Promoters of business can be made officers of corporation to participate in management

These people can also invest with limited liability as limited investors
34


This begs the question.. Can limited partners who are also officers in the corporation that is the general partner (managers) be liable as general partners on the basis they have taken part in management?
Haughton Graphic Ltd. v. Zivot (1986, Alberta)
If a limited partner takes part in the control of the business, he is a general partner
Facts : Printcast LP involved in magazine publishing. Its general partner was a corporation, Lifestyle
Magazine Inc. Zivot was president of LMI and Marshall was officer of LMI. Both were limited partners of Printcast. Both took part in running it but allegedly did so in the capacity of being officers for LMI. They dealt with Haughton to do printing. H run by Nash, who did credit check of Printcase, but was unaware of the nature of a limited partnership.
Decision : If a limited partner takes part in the control of the business, he is liable as a general partner.
EVEN IF the 3P didn’t rely on him as being personally liable
(statute says nothing about reliance)
Nordile Holdings Ltd. v. Breckenridge (1992, BCCA)
BC adopts Haughton, but can contract out of being liable as general partner
Facts : B and R officers in Arbutus Ltd; Arbutus was general partner of Arman Rental Properties LP.
Arman LP bought property from Nordile. In the exchange, it was disclosed that B was involved like this.
Decision : Adopts Haughton , but B and R off the hook b/c of agreement

Adopts Haughton Graphic – if take part in management of business, liable as a general partner

Also says, no defence of no specific reliance

HOWEVER, in this case, the agreement of sale made it clear B and R are limited partners and were not to be held personally liable – so not found liable
NOTE: Probably don’t want to rely on this case

A big part it happened this way is that both parties agreed that B and R were acting as officers of the general corporation

Next time this is litigated, may not be so clear you can contract out – the parties will NOT agree
Relationships among the partners
Separation of ownership and control

The limited partners are usually major contributors of capital, but have no control

This puts them at the mercy of the managers of the business
 Partnership Acts don’t really have provisions to protect the limited partners from being taken advantage of o But flexible – can set up parnership agreement that provides protections

Some protections in BC Partnership Act:

S. 56 – general partners can’t do an act that makes it impossible to carry on the partnership business or consent to judgment against the partnership (varying this, need consent of all LP’s o Cant possess partnership property or dispose of it for purpose other than partnership

S. 58(1)(c) – Limited partner can seek court order for dissolution and wind up of the partnership
(general partners right set out in s. 38)
35

o One situation court can order dissolution – when circumstances have arisen that in the option of the court render it just and equitable that the partnership be dissolved

S. 58(1)(a) and (b) – Right to inspect books and right to disclosure o Limited partner has same right as general partner o General partner’s right to inspect books found in S. 27(i) prefaced by words “subject to any agreement…”
Assignment of LP interests

Default rule = a partner cannot assign his interest in the partnership without consent of the other partners (S. 66) o Unless (a) all limited partners and general partners consent or partnership agreement permits it; and o (b) the assignment is made in accordance with the terms of the consent of partnership agreement

When a partnership agreement permits assignment, s. 51(4)(b) says the certificate must set out provisions concerning the right to make such an assignment, terms and conditions

Need to restrict assignment of limited partners less than general partners – so often partnership agreement will permit it w/ consent of all
Admission of Additional Partners

S. 56(d) – a general partner has no authority to admit a person as a general partner or limited partner unless the right to do so given in the certificate

S. 51(4)(c) – right to admit additional limited partners must be set out in the limited partnership certificate and agreement

S. 65 – an additional limited partner not to be admitted to a LP except o In accordance with partnership agreement and o By entry in the register of limited partners that must be kept pursuant to 54(2)
Profit Sharing
S. 61 – limited partners share in the profits and in any return of capital in proportion to their contributions unless the agreement says otherwise
Reasons for using the limited partnership form of association
-
Taxation – any losses can be passed on to the limited partners and they can make use of these losses against their other sources of income
-
Limited liability (although there are other ways of creating limited liability for investors – incorporation)
-
Greater flexibility
LLP’s different LP’s – partners don’t have limited liability, they have a shield from liability created by their fellow partners
Why were they created? Increasing scope of liability and increasingly large awards created an insurance crisis that made it difficult to obtain adequate insurance coverage
36

LLP’s in Ontario and Alberta

Partial Liability Shield – only protects against negligent/wrongful acts o In Ontario, only available for professionals o Not liable for malpractice unless directly supervising, not liable to indemnify

Business Name registration – LLP must be part of business name
LLP’s in BC

January 2005 added Part 6 to the PA

NOT limited to professional partnerships (subject to Acts governing the profession)

Full Shield Liability o S. 104(1) – a partner in a LLP is not personally liable for a partnership obligation merely because the person is a partner

Gives partners limited liability on contract debts such as bank loan or trade credit
(subject to personal guarantees) o S. 104(2)

(a) a partner is not relieved of liability in a LLP for his own negligent or wrongful act or omission; or

(b) negligent act or omission of a fellow partner
 when he knew of; or
 did not take reasonable actions to prevent is

Full Shield Liability subject to Partnership agreement o S. 104 – partners can opt out of full shield in an agreement (maybe for tax reasons) or by personally guaranteeing a loan

But the opt out just drops it to being a partial shield (the amount of losses you claim is limited to extent of investment)

LP v. LLP o The full shield liability protection in a LLP give the partners the equivalent protection from liability that limited partners have in a LP but with the advantage that the partners in a LLP can take part in the management w/o becoming personally liable for debts

Registration Necessary o LLP doesn’t come into effect until registered (like LP) o S. 94 “LLP defined as a “partnership registered…”

Cautionary suffix must be used

Registration of extra-provincial or Foreign LLPS o S. 114 – parts of these that carry on business in BC and not registered in BC will be liable as if they were partners in a general partnership
The Nature of the Corporation: Essential Characteristics
General Structure

Applied regardless of how big corporation is

Equity interests divided into shares – holders = shareholders
37

o Liability limited to investment o Shareholders have “bundles of rights” – don’t call them owners

3 basic rights must be provided somewhere in the various sets of share rights (don’t need all to be assigned to same sets of shares): o 1. Voting Rights – to elect directors who manage or supervise the mgmt of the corp o 2. Dividend Rights – to receive distribution out of the profits of the corporation when the directors choose to provide such a distribution by declaring a dividend o 3. Liquidation Rights – to receive what remains when assets sold and liabilities paid

Management structure: o Board of directors (could just be 1) – elected by shareholder(s) who appoint officers to manage day to day operations of the corp o Board makes major decisions on corporate policy o Officers (may have titles like president, CEO, vice-president, secretary, etc) may engage others to assist in carrying out managerial tasks o Directors are similar to agents, though not legally considerd as such – they are the directing mind
Key Features
There are three key features that distinguish the corporate form from partnership or sole proprietorship.
They are limited liability, separate personality, and perpetual existence.
1.
Separate Personality a.
The corporation is treated as a separate legal entity. It can own property, enter K’s, commit torts and crimes
2.
Perpetual Existence a.
The corporation does not end just because a shareholder has died or sold his shares to another person b.
It can be ended by dissolution, but can potentially carry on indefinitely
3.
Limited Liability a.
Liability of shareholders limited to amount they invested b.
Although sometimes courts will “pierce the corporate veil” and impose personal liability on shareholders i.
Especially likely in a corporation with a single shareholder ii.
If the single shareholder is another corporation, then its even more likely, because no one will be personally liable, just the affiliated corporation iii.
VERY unlikely in widely held corporations c.
There are problems with it i.
Can mean corporations don’t pay fully for committing torts against people ii.
Can increase incentives to take risks for profit – leading to environmental and social problems iii.
Can make an overall incentive not to take responsibility for your actions iv.
Can accumulate wealth to an incredible degree in corporations who can then use these resources in political lobbying to impact democracy
Benefits of Limited Liability
If creditors will charge more for advancing credit where borrower has limited liability, then what are the advantages of limited liability that made this worthwhile?
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1. Valuation
Costs
What is cost to value investment in a partnership (usually look at cash flow & risk)?
2. Monitoring
Costs
3.Diversification
Don’t put all your eggs in one basket
4.Liquidity
Refers to the ease with which an investment can be shifted to another or withdrawn for some other use. Investors value liquidity b/c if investment can easily be withdrawn they have access to the funds for personal uses
5. Optimal
Investment
Decisions
6. Market Price
Impounding
Information
Unlimited Liabillity
Need to Check
1. Earning capacity of business
(future cash flows) and risk
2. Wealth of fellow investors
** Because partners are personally liable – if fellow partners have no wealth, you will be paying full amount
In addition, the cost of this increases with the number of partners
Need to control against
1. Managers putting wealth at risk – if they make bad decision, could result in total loss
2. Changes in wealth of fellow investors - if their wealth goes down, personal liability of other partners goes up
-due to sales of their
investment
-due to changes in their
personal assets
Each investment carries risk of loss of all personal wealth - therefore keep number of investments to a minimum
Lack of liquidity due to:
1. High costs of assessing value, making it more difficult to sell
2. Controls on transfer of shares – restrictions on selling etc.
Managers may not make highest value investment since must take account of diversifiable risk to which investors exposed no single price since each investment must be valued separately (see 1 above)
Limited Liability
REDUCED:
Need to check
1. Earning capacity of the business
(future cash flows) and risk
(but not wealth of fellow investors)
REDUCED:
1. Less need to control managers since smaller potential loss
2. Don't need to monitor wealth of others or control their exit from the firm
3. Potential for control block of investment to monitor management
Facilitates Diversification:
1. Increased number of investments doesn't increase risk since personal wealth is not exposed with each investment
**reduces risk for investors, thereby reducing compensation they demand and reducing prices business must charge (benefit to society)
Improves Liquidity of investments which in turn reduces prices
1. Lowers cost of valuation information
2. Less need for control over other investors selling their investment
**investors will demand compensation for a lack of liquidity and to provide this costs will have to be raised – increased liquidity reduces societies costs investors can diversify risk and this allows managers to ignore diversifiable risk in investment decision and make highest value investment
Single price for units of investment
- price reflects just estimate of future cash flow and risk (see 1 above) – no concern for wealth of other investors
-thus price impounds important information on value of firm
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Economies of Scale
- Less likely to have funds to increase size of production to achieve economies of scale
-Per unit cost of providing goods, etc. may decrease as the size if the number of units produced increases.
-Increasing the size of production requires capital – LL tends to favor greater infusions of capital than UL
History of the Corporation in England and Canada
History of UK Corporate Law Developments

And early form of corporation used for public and ecclesiastical bodies, given a Crown Charter

Held early on that CCs were separate legal persons

BUT these were not created to carry on business activities – did not really resemble the modern form of corporation

Trading in medieval times was organized as a “merchant guild” o Not a separate legal entity, it was an arrangement among persons who carried on a particular trade for the purpose of regulating the trade – like a cartel

Joint trading done in some early form of partnership by 17 th century o One form was a commenda , where a financier made a load to a trader in return for share of profits (like s. 4(c)(iv) of Partnership Act o The societas – members would act as agents for each other, were liable to the full extent of their private fortunes for debts incurred

By 16 th
and 17 th
centuries, companies were formed for foreign trade – very risky ventures, and some would invest their fortunes in a single voyage. Crown Charters were given that typically provided a monopoly on trade in a given area o Ex. Hudson’s Bay Company o Initially, these run like merchant guilds – trading on private accounts, so didn’t have the joint endeavor character modern corporations have

Later, voyages were run on a joint stock basis – persons would make investments which would be used to buy goods for the voyage – the company would trade the goods in distant land and bring back goods received in exchange for sale in England, and the profits were shared by the investors

By 16 th
/17 th
century, these joint stock companies were formed by Crown Charters – organized as large partnerships with provisions to make shares (partnership interests) transferrable o These actually quite similar to corporations, except that they weren’t separate legal entities, so the partners would hold title to property for the business

By 17 th
/18 th
century, companies being formed by separate statutes passed by Parliament o Ex. A statute for the formation of the South Sea Company o These companies resembled modern corporations, although not yet clear if they had separate legal status, and liability of investors probably not limited

So: 18 th
century, these are the options – partnerships, joint stock companies, crown charter companies, and companies formed under separate statutes

THEN: South Sea Bubble o Early 18 th
century South Sea Company formed intended to exploit opportunities for trade with South America o South Sea Company turned into a pyramid scheme with many wealthy and influential ppl of the day buying shares
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o Company started to tank so government enacted the Bubble Act
– made joint stock companies (large partnerships) illegal which only left special statute and charter companies – they planned that those people that had shares in joint stock co.’s would look to invest elsewhere o The idea was that the South Sea company had been formed by separate statute, so investors returned to them when their joint stock companies ended o Bubble Act plan backfired – joint stock companies had to be wound up and so had to realize on their assets and pay off liabilities. The problem being that investors had bought their shares on credit, and now were being forced to pay up, and to do so, had to sell of their shares from other investments – like in the South Sea Company

Effect of the Bubble Act may have been a delay in the development of corporations and corporate law in England

Repealed in 1825 – a court in 1828 suggested formation of joint stock companies might actually be illegal at CL (raised further concern) – but court in 1843 said they are legal at CL
Then, England moved towards general acts for Incorporation

1844 Joint Stock Companies Act o Provided for incorporation by registration with full publicity of particular’s of corporation’s constitution – but it preserved personal liability o Companies formed by filing Memorandum of Association

1855 Limited Liability Act – limited liability of company shareholders to amount of invest

1856 Joint Stock Company Act
Canadian Corporate History

Earliest corporate form was from Crown Charters

1849 – Acts passed allowing for the grant of letters patent to create companies for building roads and bridges – these are like Crown Charters, but exercised by an administrator under a general statute of incorporation

1850 – general statute of incorporation for mining, shop building, manufacturing, etc

1864 – United Provinces Act – provided for grant of letters patent on application to Governor in
Council o Had to give public notice of intention to incorporate and satisfy appropriate authority that corporate name was not used by another corporation

Letters patent vs. Crown Charter o Letters patent an exercise of Crown perogative – extension of granting a charter?

Grant of letters patent was not a right, but by permission o Letters patent granted by an administrator o Was soon granted separate legal personality like Crown Charter o In contrast to memorandum of association, letters patent were much more detailed, specific provisions on conduct of affairs of company, not so flexible o Concept of ultra vires NOT applied to letters patent

Canada Business Corporations Act
BC Corporate Law History

1859 Sir James Douglas, by Proclamation, enacted that the Statutes of England with respect to
Joint stock companies be extended to BC

1999 - Company Act passed – not declared in force and replace by BCA
 2002 – Business Corporations Act
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Three Ways in which corporations might be formed
1.
Crown Charter a.
Still theoretically possible, but very unlikely b.
There are still some existing companies formed by grant of Crown Charter - HBC
2.
Special Statutes of Incorporation a.
Legislature passes statute stating “An act to incorporate ABC company” b.
Nothing to do with BCA or CBCA c.
Common with hospitals, municipalities, universities, stock exchanges
3.
General Statutes of Incorporation a.
Canada Business Corporations Act, provincial equivalents – like BC’s BCA and Society
Act b.
Federal level - Federal Bank Act, Insurance Companies Act c.
The CBCA is in articles style, the BCBCA is of the memorandum of association style
*** As a lawyer, the first thing you should do when dealing with a corporation is to find out how it was incorporated – to determine what statute governs the internal affairs of the company***
Three Types of General Statutes of Incorporation
1.
Memorandum of Association – BC BCA a.
English approach b.
The memorandum of associate is a contract among the members c.
Incorporation as of right by filing required documents d.
A simple document showing original subscribers of the shares, authorized capital
2.
Letters Patent a.
Early Canadian approach – see above b.
Again, incorporation not a right, need permission
3.
Articles of Incorporation – CBCA a.
Modern style in most Canadian jurisdictions b.
Modeled on US corporate statutes c.
Articles of incorp is a simple document – contains elements of MOA plus d.
Incorporation as of right on filing of required documents
The Constitutional Position
Both the federal and provincial governments have power to incorporate companies
PROVINCIAL POWER
 s. 92(11) – provinces can make laws in relation to “The Incorporation of Companies with
Provincial Objects”
FEDERAL POWER
 s. 91 – Federal government can make laws “in relation to all matters not coming within the class of subjects assigned exclusively to he legislatures of the provinces”
 Residual power – POGG - so objects other than provincial objects

S. 91(5) Incorporation of Banks

Also, s. 15(2) of CBCA preserves federal power for CBCA corporations by granting powers to carry on business through Canada
What is the Meaning of “Provincial Objects” - Provincial powers or within provincial territory?
42

Bonanza Creek Gold Mining v. The King (1916, PC)
It’s territorial – provincial power to incorporate for any object so long as its carried out within the province. Outside the province, its subject to restrictions of the other province.

The province could confer power to companies to carry on business within and outside the province

But it could not confer the right to operate in another jurisdiction – up to other jurisdiction

Similarly, a provincially incorporated company can carry on business anywhere in the world as long as the country gives it permission
What is the meaning of the federal power?

Federal powers of incorporation are not limited to businesses that carry out business related to the enumerated heads
Citizens Insurance Co. v. Parsons (1881)
In comparison to the incorporation of banks power, the federal government has a “ broader power to incorporate companies under its residual power”

Power to give companies the right to carry on business throughout Canada
Scope:
John Deere Plow Co. v. Wharton/Duck (1914, PC)
Federally incorporated companies have both power and right to operate throughout country (now preserved in s. 15(2) of CBCA)
Facts : W was shareholder in company called John Deere Plow Co. which was incorporated in BC. He sought to stop the John Deere Plow Company, a federally incorporated company from operating in BC.
Argued the fed company could not be granted a license to operate in BC b/c its name was confusingly similar to the one already in BC.
Decision :
 Since the federal government’s residual power to incorporate companies was a power to incorporate companies with something more than just “Provincial Objects”, a federally incorporated company has the power and the right to operate throughout the country

Refusing to register the federal John Deere would have been contrary to this constitutional right of carrying on the business throughout the country

Note the limitation below in Canadian Indemnity Co. v. AGBC
Great West Saddlery Co. Ltd v. The King (1921, Ont PC)
Legislation prohibiting a company from maintaining a legal action in the province unless it had obtained a license to carry on business in the province could not be applied to a federal company.

Ability to maintain action (like to enforce a K) arguably essential to running a business
Colonial Building and Investment Association v. AG Quebec (1883)
It’s not necessary for the validity of a federal incorporation that the company carry on business in more than one province
AG Can v. AG Man (1929)
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Decision in John Deere suggests federally incorporated companies are immune from provincial regulation – this case supports that
Facts : There was legislation requiring anyone selling shares to public to obtain a license. A license was up to discretion of an administrator.
Issue : Could this discreton be applied to a federal company?
Decision : A federal company could not be refused a license, since the sale of shares I necessary to finance a company, and without that financing, couldn’t even carry on the business
NOTE: Modern provincial securities legislation probably does apply to federally incorporated companies, in spite of this case
Regulating Federal Companies with Provincial Legislation
It is now held that provincial regulations apply to federal companies if it doesn’t prevent the business from carrying on or discriminate to only affect federal companies. The company must also register its name in the province
Lymburn v. Mayland (1932)
An Alberta statute could apply to a federally incorporated company b/c it wouldn’t prevent the federal company from carrying on business in the province
Great West Saddlery
Suggested that a fed comp incorporated for purpose of holding land would be unable to successfully attack prov leg that prohibited corporation, wherever incorporated, from owning land (followed in
Canadian Indemnity Co.
)
Canadian Indemnity Co v. AGBC (1977, SCC)
Province can ban all companies (fed and prov) from undertaking a certain activity (sale of insurance) in the province
Facts : BC had replaced private auto insurance with a public scheme (ICBC). Legislation prevented sale by anyone else. Canadian indemnity and 17 other companies challenged it.
Decision
: Legislation upheld because it wasn’t restricted in application to federally incorporated companies, but applied to ALL (didn’t discriminate)
Multiple Access v. McCutcheon
Provincial legislation that was identical to legislation in the Act under which a federal company was incorporated could still be applied to the federal company . The federal legislation was not occupying the field, did not conflict with provincial legislation. Both pieces were valid .
Reference Re the Constitution Act
Provincial legislation requiring federal companies to register name is valid
Re Royalite Oil Co (1931, Al CA)
Provincial legislation imposing penalties for failure to comply with the requirement to obtain an extraprovincial license before commencing carrying on business in the province valid wrt federal companies
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Conclusion on Constitutional Position

Both provinces and federal government can pass valid legislation for the incorp of companies

A corporation incorp under prov statute can carry on business throughout the rest of the country as long as other provinces permit it

A fed incorped company can operate through country or in one or a number of provinces

Fed incorped companies have to obtain at least one extra-prov registration in order to carry on business in Canada – adds to cost (vs. prov where don’t need registration in home province)

Federal incorporation provides protection of corporate name (no suing for passing off)

For the most part, provincial laws apply

2 important restrictions o John Deere – province cant deny license to federal company based on same corporate name o Great West – a province cannot prevent a federal company from maintaining a legal action in the province
Dickerson Committee

Appointed by federal government to examine corporate law

Made recommendations that were followed by enactment of CCA o Like, using articles of incorporation
The process (under the CBCA)

S. 5 – who can incorporate o (1) One or more individuals may incorporate, no one can be under 18 yrs old, of unsound mind, or bankrupt o (2) One or more bodies corporate may incorporate a corporation o In either case, must sign articles of incorporation and comply with s. 7

S. 7 – signed articles in Form 1 must be sent to the Director (administrator of the CBCA) as well as documents required by s. 19 and 106 o S. 19(2) must file notice of the registered office o S. 106(1) must file notice of directors of corporation must be sent to Director

What do the articles contain? S. 6: o The articles are an important constitutional document of the corporation o Corporate name
 Can’t be same or confusingly similar to name of another
 If going to have name other than a numbered name, fill in NUANS Name Status
Report o Restrictions on the business of the corporation o Limits on the authorized capital of the corporation o Classes of shares and any maximum number of shares that the corporation is authorized to issue o If 2 or more classes of shares, the rights, privileges, restrictions and conditions attaching to each class o The province in Canada where the registered offices of the corporation will be o Any restrictions on the transfer of shares o The number of directors the corporation is to have (or min and max # will have)
45

o Any other matters one chooses to put in the articles

Must pay filing fee (Reg. s. 97 and Schedule 5)

S. 8 and 12(1) – on receipt of the above required documents and upon their assessment, the
Director shall issue a certificate o Shall means once the requirements satisfied, the incorporators have a right to certification of incorporation

S. 9 The corporation comes into existence on date shown in the certificate of incorporation
Post-Incorporation Steps (under the CBCA)

S. 104 – after the issue of the certificate of incorporation, a meeting of directors shall be held at which the directors may o (i) make by-laws for things like:
 Procedure at director’s meetings

Notice for and procedures with respect to shareholder’s meetings

Procedures for the allotment and issuance of shares

Procedures for the declaration and payment of dividends

Procedures for the appointment of officers o (ii) Adopt a form of share certificate and corporation records o (iii) Allot and issue shares to persons they intend to be shareholders of the corporation o (iv) Appoint persons designated as officers and delegate particular tasks o (v) Appoint an auditor to hold office under first meeting of share holders o (vi) Make banking arrangements o (vii) Transact any other business
In BC

First must file and incorporation agreement, under which the incorporators gree to take the initial shares

Then file an incorporation application (similar to s. 7 CBCA)

With this application, file a Notice of Articles (basically the same as the old memorandum)
 Also file an incorporator’s statement, stating who is going the incorporation
Corporate Name and the Approval Process

Names may be important because of the value they have from recognition, goodwill associated with the name

Complex web of law deals with commercial use of names o Federal trade name, trade mark law, provincial laws, registration of corporate names, common law dealing with passing off

S. 12(1) – Director has power to refuse prohibited or deceptively mis-descriptive names o S. 12(2) or order a change of name of an existing corporation

Certain Names are prohibited o Obscene words o Names that suggest they are carried on with governmental approval o If they create confusion with other names o Misdescriptive names (reg 25) o If it is too general (ex. Shoe Store Ltd)

Essential elements of most corporate names = descriptive part, distinctive part, and suffix (ex.
Kwitfit Shoemakers Ltd)

You can reserve a name for up to 90 days ahead under CBCA s. 11
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
S. 88 Partnership Act – If a corporation is using a business name other than its own corporation name, must register the business name o These are called Doing Business As Names (DBA’s)
Why Incorporate?
Seven Common Advantages of Incorporation
1.
Limited liability for shareholders a.
This is in contrast to J&S liability of partners b.
May not provide much benefit where the SP or partners have to provide a personal guarantee (to banks, lessor, suppliers) c.
Also, courts may pierce the corporate veil and make shareholders personally liable to protect tort claimants
2.
Perpetual succession a.
May not be significant for SP who can leave assets to estate and business can be carried on that way b.
Or, if selling assets of business, SP can assign important business related contracts to the acquirer c.
In addition, this problem is taken care of for partnerships who have in their agreement that death/bankruptcy of one partner just releases that partner from the partnership while the remaining partners remain in the partnership
3.
Ease of Transfer of Shares a.
No significant difference b/w transfer of shares in closely held corporation vs. transfer of partnership interests in a partnership b.
Closely held will usually have restrictions on share transfers i.
The shareholders want involvement in business, don’t want just anyone buying the shares ii.
Also due to securities regulations – expensive to comply, constrained by their nature
4.
Individual partners may bind a firm, but a shareholder alone cannot bind the corporation a.
This is true, however the individual shareholders are usually officers of the corporation and authority is often delegated to them to acts as agents to bind the corporation b.
Corporation will be vicariously liable for the torts committed by its officers c.
When the corporation is closely held, this will mean small difference from partnership liability
5.
A shareholder can contract with or sue a corporation (partner cant sue his firm) a.
Way to achieve similar result in partnership by having the partner K with other partners separate from partnership agreement
6.
Corporations have facilities to secure additional capital a.
Corporations can sell shares or issues debentures b.
Partnership cant sell shares, but can take on another partner to get extra capital
7.
Tax advantages may accrue to the SP or small partnership that converts to the corporate form a.
Tax advantages to incorporation: i.
Form Corporation that operates as a small business. The small business deduction can provide a significant tax advantage to incorporation – can get a reduced tax rate on first 400,000 of income ii.
But this is of no advantage in start up phase when business not making profit b.
Disadvantages:
47

i.
Double taxation – income taxed in hands of corporation and then taxed again as income to the shareholder ii.
Also, recall the tax advantages of partnerships and SP’s – can use losses against your other sources of income
8.
General Disadvantage – Costs of incorporation a.
Don’t arise with SP or partnership i.
Fee for incorporation itself ii.
Legal fees iii.
Filing of annual reports iv.
Maintaining corporate records, etc.
Choice between CBCA and BCBCA

Reasons to prefer CBCA o Name protection

Remember John Deere – can’t be refused registration based on similar name o No restriction on maintaining an action o Lawyers and shareholders in other provinces familiar with it

Reasons to prefer BCBCA o It is cheaper (in CBCA need one more extra-prov registration) o Easier to deal with Victoria than Ottawa o Lawyers in the province more familiar with it
Reincorporation/Continuance

A corporation that has been incorporated in one jurisdiction may decide to become incorped under a different statute in another jurisdiction o Process of changing the statute of incorp = “reincorporation”
 “Continuance” is the most convenient way of reincorporating o Procedure for continuance out of CBCA (export continuance)

1. Obtain a resolution from the shareholders permitting it (CBCA s. 188(1)(5)
 2. Obtain approval from the Director (s. 188(1))

3. Register in the other jurisdiction making amendments to the incorporation documents to make them conform to the requirements of the jurisdiction in which the company is being incorporated

Will have to satisfy name requirements o Procedure for continuance into CBCA

Pretty much same thing – will probably need approval of shareholders and approval from registrar who administers the statute
Extra-Provincial Registration
Common requirement around that world is to require corporations carrying on business in a jurisdiction in which they were not incorporated to register

foreign corporation registration

Typically have to go through name approval process similar to for incorporation

In Canada

Extra-provincial registration o Requirement to have a registered attorney in the province who can receive legal documents in province – so you cant hide from suits! (Probably the main reason to have this registration scheme)
48

o Registration enforced through various means, like fines, prohibitions against maintaining a suit in the jurisdiction, holding an interest in land in the jurisdiction
Registration under the BC BCA

Foreign Entities – s. 375 must register as an extra-provincial company within 2 months of beginning to carry on business in BC o S. 1(1) foreign entity = a foreign corporation or a LL company
 Foreign corporation is a corporation that is not a “company” and a company is defined as a company incorporated under the BC BCA

Therefore, a foreign corporation is a corporation not incorporated in BC

It must be for-profit

LL company – new type of corporate entity developed to allow investors to carry on business through a corporate entity but still pass through any losses to the investors for tax purposes
 LL company = a business entity that was organized in a jurisdiction other than
BC and that is recognized as a legal entity in the jurisdiction in which it was organized and that is not a corp, partnership or a LP

Carry on business – s. 375(2) – a foreign entity is deemed to carry on business if o Its name/name by which it carries on business is listed in telephone directory in any part of BC with address or phone number o Its name/name by which it carries on business appears in an advertisement o It has an agent resident in BC o It has a warehouse, office, or place of business in BC o Or otherwise – court’s discretion – a question of the degree of presence of the foreign entity in the province

Registration Requirements – s. 376 o Reserving the name of the foreign entity o Filing a registration statement o Appointing one or more attorneys

S. 386 – requires extra provincial companies to have one or more attorneys who can be either an individual or a company

S. 388 – each attorney for an extra-provincial company is deemed to be authorized to accept service of process on behalf of the extra provincial company in each legal proceeding by or against it in BC and to receive notices to the company
Salomon v. Salomon & Company, LTD
Key points – corporation is separate legal entity, legitimate to have one-person company
Facts : Mr. S had previously formed a boot manufacturing business that he ran as a SP. He sold his business to a company he formed, with him holding most shares, and 6 others holding just one share to satisfy the old legal requirement of 7 shareholders. He bequeathed his shares to his children. So, he turned SP into corporation but remained in control. Business had problems, Mr. S and his wife lent
49

money to the company. Gets complicated… I don’t know, but all these creditors came after him personally
Decision : Found for Mr. S, the company was a separate legal entity
Important points to take away include
 T his case often cited for the point that the corporation is a separate legal entity o Otherwise, notion of limited liability in Companies Act wold be defeated

A shareholder can also be a secured creditor of the corporation o Can rank equally with other creditors for the amount of the debt – or even ahread to the extent of security held for the debt
Policy

Potential Fraud of creditors – House thought likelihood of frad was small in this case given apparent value of the business at the time it was sold and fact that S’s loaned money to business in attempt to keep it going

Could creditors have been deceived? – may not have been aware the business was now a limited company; may have been deceived by book value of business

Affect on existing businesses – were concerned about saying this kind of business was not valid
Some implications of separate legal personality
1.
It is possible for a shareholder to also be a creditor of the company ( Salomon ) and rank equally or ahead of other creditors if have security interest
2.
A shareholder can be a director, and officer, and/or employee of the corporation
Lee v. Lee’s Air Farming Ltd (1961)
Same question as Re Thorne where partner couldn’t get employee benefits b/c partners can’t be employees but in context of corporation – different rule!
Facts : Lee was sole shareholder of Lee’s Farming – Also the sole director, managing director, and only employee. This is not uncommon. Lee died, his wife made claim for worker’s compensation. Claim resisted on basis that Lee couldn’t be employee b/c he was employing himself.
Decision : Lee was not employing himself – the company employed him and they are not the same person

Implication: company is a separate person that acts through its shareholders or directors to the extent they have powers to authorize certain acts by the company
3.
The Corporation owns the assets not the shareholders
Macuara v. Northern Assurance
Facts : M transferred all assets into a corporation and took shares for it. He hen signed insurance contracts on timber in his own name. Timber was destroyed, and he claimed on insurance.
Decision : M couldn’t claim on insurance because he didn’t have an insurable interest (he did not own the timber – the company did, and only the owner can insure).

EVEN THOUGH he owned all the shares in the corporation

The shareholders have a contractual claim against the company with respect to the rights given in the shares, but they don’t have ownership interest in the assets of the company
NOTE – this decision overruled in Canada by Kosmopolous – which said that shareholders CAN have an insurable interest. But this does NOT mean that shareholders own the assets of a corporation .
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Sparling v. Caisse de depot de Placement (1988)
Affirmed the view that shares are bundles of rights , and these rights do not include ownership of the assets of the corporation
Potential Problems with Legal Personality
 Limited liability coupled with separate personality creates potential problems, like if know the business is approaching insolvency might:
1.
Shareholders becoming creditors when the corporation is insolvent a.
Can defeat the interests of creditors and 3P’s by sharing in the distribution of assets b.
Can even get a security interest to put their interests ahead
2.
Company may make payouts to shareholders when it is insolvent a.
“Abandoning Ship” b.
Three ways to try to do this i.
Distribution of large dividends tot eh shareholders ii.
Repurchase of shares by the corporation iii.
Return of the capital invested to the shareholders c.
If this allowed, company would be liable to it creditors but have very little left over after distribution to shareholders d.
These things PREVENTED BY STATUTE
Other Problems:
3.
As separate entity, it can enter K’s with shareholders, but a company might enter into K’s with majority shareholders that are unfavorable to others
4.
A person might set up a company with very little capital and defeat the interests of creditors who act in reliance on the presence of some minimum adequate amount of capital a.
Would be particularly bad for tort claimants – would lose opportunity to deal with corporation
5.
3P’s may be deceived into thinking they are dealing with an individual or partnership business when they are in fact contracting with a corporation that has a separate personality and in which shareholders have limited liability a.
May have occurred in Salomon if they delat with him before incorporation
6.
Persons may incorporate a company to avoid personal obligations or restrictions a.
Ex. Have entered into a non-competition K saying wont operate particular business in particular area for a period of time. To avoid commitment, incorporate a company and hire yourself, saying you aren’t the one carrying on the business, so haven’t breached the K
Promoters of companies will often enter K’s on behalf of proposed corporations in order to secure the
K before time of incorporation. To get things ready, ensure important K in place before taking expense to incorporate, etc. Normally, the promoter doesn’t have any intention of being personally liable. But this may lead to problems where the promoter doesn’t know if the corporation has been incorporated or not yet, and 3P’s often don’t know.
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Problems arise – maybe corporation never actually incorporates, or tries to ratify K’s entered on its behalf before incorporation. Maybe the corporation is insolvent but trying to ratify a K. The 3P may be left to bear a loss if the promoter relieved of personal liability.
Remember Ratification Principles
 The person who seeks to ratify must have been in existence and ascertainable both when person tried to act on his behalf

Person who wants to ratify must have had legal capacity both when K entered and at time of ratification
These make it impossible for a corporation to ratify a pre-incorporation K.
This is confirmed in:
Kelner v. Baxter (1866)
Promoters personally liable for Pre-incorp K’s
Facts : P and D were promoters of Gravesend Hotel Ltd. P was to be the manager. Before company incorporated, the P offered to sell a stock of wine to the company, accepted by D’s on Jan 27, 1866. On
Feb 1, the company ratified the agreement. But the promoters didn’t get certificate of incorporation until Feb 20, 1866. The directors, to avoid personal liability to the P, tried again to ratify the agreement on April 11, 1866 just before the company went bankrupt.
Issue : P sued D’s (no point suing corp, its bankrupt). D’s claimed not personally liable – were they?
Decision : Ratification not valid
 Company not in existence at time and ratification can only be done if have capacity to K at time the K was entered as well as at ratification

But, clear that parties intended to K, and only way this could be a valid K was if the D’s were the other contracting parties (can’t have K’d with the company, didn’t exist) o Promoters held personally liable
Unclear after this case:
 Are promoters automatically liable in these situations (“rule of law” approach)

Or is the promoter only liable if it was intended in the circumstances they were themselves to be a party to the contract (“rule of construction “ approach”)
Newborne v. Sensolid (Great Britain) Ltd, 1953
English court adopts rule of construction approach
Decision : Promoters were only liable if it was intended in the circumstances that they were themselves to be parties to the K

Real test – whether the promoter intended, in the circumstances, to be a party to the K or not
Black v. Smallwood & Cooper (1966)
Australia adopts the rule of construction approach
Facts : K signed by Smallwood and Cooper thinking company had been incorporated and they were directors. P’s wanted to impose liability on the basis of rule of law reading of Kelner saying that a K
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was clearly intended and since it could not be with the principal, which didn’t exist, it must have been w/ the purported agents personally.
Decision : Followed Newborne and held Kelner was not authority for the principles that an agent signing for a non-existent principal is bound
Wickberg v. Shatsky (1969, BCSC)
BC takes the rule of construction approach
Facts : L and H Shatsky became shareholders in Rapid Ltd and became directors. They decided to expand, incorporated new company, Rapic Data (Western) Ltd to take over Rapid Ltd. RDW never formed, later proposed that Celer Ltd take over. Certificate of incorporation for Celer issued May 11,
1966. Wickberg hired as manager on May 6. Terms of employment written on RDW letterhead, signed by Shatsky. Business didn’t go well, cant pay his salary, ask him to wok on just commission. He says no, they fire him.
Issue : Proving he had an employment K, since it was made before the incorporation of the company he was hired for. Wickberg argued that the Shatsky’s were parties to the K and were liable for breach of warrant of authority when they warranted the company was in existence and had authority to act.
Decision: A person signing on behalf of non-existent company not automatically personally liable

In this case, no intention for the Shatskys to be personally liable – clear it was for the corporation

BUT there was a breach of warranty of authority so he got nominal damages
Summary:

Kelner confirmed that a company cannot ratify a K (or purported K) entered into on its behalf if company not in existence at time person purported to enter into K on its behalf

A promoter can be liable on a pre-incorp K but only if it can be said that it was intended in the circumstances that the promoter be a party to the K (Kelner as interpreted in Newborne,
Black, Wickberg)

Where promoter purported to act on behalf of corp before it came into existence the promoter can be liable for a break of warranty of authority (Black, Wickberg). However, the damages may be nominal where the corp or business is now insolvent (Wickberg)
Problems with the Common Law

Risk for both promoter and third party that there would be no enforceable K

Created a risk that reliance on purported K would be defeated

Creates unnecessary costs – both parties will have to take precautions to ensure that the corporation is in fact incorporated
 Possible unjust enrichment for promoters at expense of 3P’s (Newborne)
How CBCA modifies the Common Law Position – S. 14

14(1) provides that unless K expressly provides otherwise (see 14(4)), a person who enters into, or purports to enter into a written K in the name of or on behalf of the corporation before the corporation comes into existence, is personally bound by the K o COFIDIES THE RULE OF LAW APPROACH
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o NOTE – says “written”, so if K not written, this section doesn’t apply

14(2) a corporation can adopt a K after it comes into existence o If adopted, the corporation is bound and the person who purported to act on behalf of the corporation is no longer liable
 must be adopted in a reasonable time
 anything they do to indicate they intend to be bound

14(3) the Court can apportion liability b/w the corporation and a person purporting to act on behalf of the corporation o This idea came from Dickerson Report o Idea was that if they tried to adopt a K on the eve of bankruptcy to avoid promoter liability, the court could use its discretion for fairness

14(4) parties can expressly agree in written K that the person who enters into the K on behalf of the corp before it came into existence is NOT bound by the K or entitled to the benefits of it
Cases applying s. 14
Landmark Inns v. Horeak (1982)
Facts : H and 3 others plan to enter business, rent space at shopping centre signed on behalf of corporate entity (not yet incorporated). Owner of shopping center makes modifications to space for the
(costs money). H then decide to get space elsewhere and don’t ratify the K. P claimed for cost of renovations and 6 months lost rent. To avoid this, H incorporated a company that had no assets and got that company to ratify the K – claiming he was safe by 14(2). He also tried to say that since he signed in the name of the corporation, it was an express provision in terms of 14(4) that he was not bound.
Decision
: For the P’s.
 A corp can’t adopt a K that has been repudiated b/c it is ended and there is nothing to adopt. H repudiated the K when he told the P he wasn’t moving in.

So the K no longer existed when he incorporated the second company.

Also, simply having the name of the corp on a K is not sufficient for the purposes of 14(4) to alter liability of the promoter under s. 14(1)

These circumstances seem perfect for 14(3) but court didn’t bother, saying, K already repudiated
Bank of NS v. Williams (1976)
3P not misled to which party advancing money – not entitled to reapportionment
Facts : Mrs. A takes 2 nd
mortgage out on house by bank – loaned money to Williams (and her husband) for company, pre-incorporation. Company not insolvent at time, but becomes insolvent. Claim against company not good so she goes to court and argues the promoters are liable, trying to get at least reapportionment under s.14(3)
Decision : If third party knew they were dealing with company, you should not succeed in apportionment.

Its not like the situations Dickerson report had in mind – she knew who she was dealing with and accepted the risk the corporation might not be able to pay
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Potential problems with s. 14
1. Constitutional Problem

Pre-incorp K’s deal with enforceability of K’s, but laws about ‘s are provincial power under property and civil rights

We know it has ancillary powers associated w/ power to incorp companies based on its s. 91 power to incorporate them – but does it include power to regulate K’s?

Not yet addressed by courts
2. Jurisdictional “conflict of laws” Problem
 If s. 14 is constitutionally valid…

What happens if its in a province where the C/L on pre-incorporation (rule of construction) would apply

Would the CBCA provision be paramount?
How the BC CBA modifies the common law approach – S. 20

20(2) The promoter is deemed to warrant that the company will come into existence or adopt the purported K within a reasonable time o If it doesn’t happen, the promoter is liable
 This applies to both oral and written K’s

20(8) If expressly agreed in writing, 20(2) won’t apply
 Note that 20(2) doesn’t make the promoter liable on the K itself – its more of a statutory misrepresentation provision

20(2)(c) sets out measure of damages – appears to agree with Wickberg in giving damages based on breach of warranty of authority

20(3) The company may in a reasonable time adopt the K (overrules Kelner on this point)

20(4) on adoption, the promoter ceases to be liable under s. 20(2) for the warranty

20(6) similar to 14(3) for apportioning liability
Ways of enforcing pre-incorporation K’s under the CL
1.
Promoter as trustee of a chose in action – promoter would be under a fiduciary obligation to enforce the K
2.
Company as assignee – court may be able to treat K as having been assigned to the company (as opposed to ratification)
3.
Restitutionary Principles – although there was now valid K, there was a “quasi-contract”
4.
Infer a second K from a course of dealing – court may look at part performance and infer another K b/w the 3 rd
party and corporation
5.
Offer to promoter as agent for the third party to make an offer to the company – promoter might be viewed as agent of third party with authority to make offer to corporation on same ters as those involved in the dealing b/w promoter and third party
6.
Provisional K to become binding on a future event (incorp of the company)
Practical Notes

IF you are asked to incorp company – warn client that if they go out an act on behalf of the company and enter in K’s on behalf of company they are personally liable (under CBCA)

Not so strong in BC but they could be liable under breach of warranty of authority

Solution: Incorp immediately under a numbered name and change name later – however, potential problem that client will still go out and K under the name of the company they hope to incorp/change name to later
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
In major transactions, check registry to make sure it has been incorporated, and require a certified copy of the certificate of incorporation as a closing document for the transaction
Salomon = corporation is a separate legal entity.
BUT while it is rare, the courts have sometimes disregarded the concept of the corporation as a separate legal entity or separate person in order to assign liability to individual shareholders, directors or officers. This is called piercing the corporate veil. Rare to happen, it’s an uphill battle
Kosmopolous v. Constitution Insurance Co of Canada (1987, SCC)
When will courts pierce the corporate veil? When it would be too flagrantly opposed to justice to apply the principle of Salomon. The situations will follow no consistent principle .
Reasons and Rhetoric for Piercing
1.
Agency, alter ego, puppet, instrumentality, sham or cloak a.
The TJ in Salomon said that he couldn’t claim on the debentures and would be personally liable to the creditors on the basis that the corporation was just an agent of his
(so still separate entity) i.
This isn’t really piercing the veil, but its actions bind the shareholders as principals, so debts incurred by corp really are debts of shareholders b.
Courts picked up on these, using the above terms
2.
Disregard of corporate entity by the shareholders or directors themselves a.
Failure of shareholder(s) to maintain the separate identity of the corporation b.
Don’t make annual filings, don’t keep minute books, etc
3.
Conduct akin to fraud ( Gilford Motors v. Horne )
4.
Affiliated enterprises a.
Courts more willing to pierce when the effect of doing so is to link a parent company with its subsidiary – Smith, Stone and Knight b.
On exam, write out full tests
Smith, Stone and Knight Ltd v. Birmingham Corporation (1939)
Facts : SSK owned all shares of a subsidiary company. City expropriated premises on which subsidiary was carrying on business and compensated business for its loss. SSK sought additional compensation.
SSK asked the court to pierce the veil so it could see SSK’s losses and not just the subsidiary’s. (The law was such that the amount to pay the subsidiary much less than realizing SSK’s losses). City challenged right of SSK since the subsidiary company was a separate legal entity.
Decision :
There is an exception to the Salomon principle where the corporation is simply an agent of the shareholder. The 6 tests suggested were:
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 be done and what capital should be embarked on the venture?
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5.
Did the parent company make profits by its skill and direction?
6.
Was the parent company in effectual and constant control?
Applying the tests, court found SSK was proper claimant.
Problem – the answer to these questions is almost always yes in parent-subsidiary relationships
But the corporate entity not disregarded in every affiliated case – must be something more going on.
Gregario v. Intrans-corp (1984, OCA)
Subsidiary not alter-ego of parent
Facts : G bought truck from Intrans that was defective. Intrans ordered the truck through Paccar Canada
Ltd., the Canadian subsidiary of Us’s Paccar LTd. Paccar Canada got the truck from US Paccar. G brought a claim to Paccar Canada for negligent manufacture of the truth. But they weren’t the ones who manufactured it – Us did. But jurisdictional problems make it hard to go after US company.
Issue : Can the Canada company be responsible because it was one and the same person as the parent?
(ie, asked court to ignore the separate legal entity of the Canadian subsidiary)
Decision :
 Even if 6 tests met, a subsidiary won’t be found to be the alter-ego of it’s parent company

Unless! The subsidiary is under the complete control of the parent and is nothing more than a conduit used by the parent to avoid liability

Alter-ego meant to be applied to prevent conduct akin to fraud
Albert Gas Ethylene CO v. MNR (1989)
It is not sufficient to consider the 6 criteria and when they are all met to ignore the separate legal existence of a subsidiary company.
Must ask what purpose and in what context the subsidiary is being ignored

Here, Alberta Ethylene, Canadian corp wanted financing from US insurance companies

Insurance companies faced US restrictions on the non-domestic portion of their investment portfolios b/c they charged a higher rate for non-domestic loans

To get lower rate, AE incorporated a 100% owned US subsidiary in Delaware

Loan then made to that corp who loaned it to AE

Minister of National Revenue assessed AE for withholding taxes on interest payments made to the Delaware company as a non-resident

Argued it was an empty shell, straw man, so should pierce corporate veil
Note: Court seems to be more willing to PCV when the entities could be considered as one, and the purpose of PCV is to get assets of parent company, not necessarily the assets of shareholders (which would negate benefits of LL)
Why might this be? Contrast Mangen and Walksovsky – essentially the same facts, one key different
Mangen v. Terminal Cabs Ltd (1936, NY)
Facts : Terminal Cabs was parent company of 4 subsidiary taxicab companies, owning 60% shares of each of them. The P was injured b/c had to swerve to avoid cab owned by on of subsidiary companies.
P’s wanted to PCV and get to parent company
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Decision : The accident was result of negligence of taxicab driver, no contributory negligence from the
P’s.
The court did PCV, making the subsidiaries one and the same with Terminal . The P got access to the parent’s assets.
Walkovsky v. Carlton (1966)
Facts : Carlton had taxicab business. He set up 10 cab companies, with him as individual shareholder of all, and each company’s assets were just 2 cabs. Taxicab companies usually use old cars, probably not worth much (each cab was thinly capitalized). Each company had statutory minimum of 10,000 3P insurance. W was pedestrian, struck by taxicab. Injuries significant, assets of cab company togther with
10,000 insurance no enough to compensate for injuries. He wanted to have court PCV and make
Carlton personally liable.
Decision : Court wouldn’t PCV
WHAT IS THE ESSENTIAL DIFFERENCE?

In Mangen , the shares of subsidiary companies owned by another corporation – court pierced o There was intermediary b/w individual shareholders and separate companies

In Walk , the shares were owned by an individual
WHY THE DIFFERENCE?

In Mangen , the shareholders were made worse off because their shares would be worth less now
BUT they weren’t personally liable o The benefits of limited liability wouldn’t be lost

In Walkovsky
, “It is one thing to assert a corp is a fragment of a larger corporate combine which actually conducts business…. Its another thing to claim that the corporation is a dummy for its individual stockholders whoa re in reality carrying on business in their personal capacities. In the first, only a larger corporate entity would be held financially responsible… while in the other, the stockholder would be personally liable.

Courts have a sense of the significant implications of PCV on limited liability
Situations in which courts more inclined to PCV and associated policy
1. Gap Filling and Implied Contractual Terms

Court will PCV to gap fill

Court is saying, although parties did not put in a provision restricting the use of a corporation to avoid obligations under the agreement, such a provision would have been put in had the parties directed their minds to it

Policy – reduce transaction costs

Could let loss lie where it falls so parties have incentive to plan, but there are many creative ways to avoid obligations and trying to anticipate them all and draft the right provisions would be very costly

Cost may be so big to make the K no longer worthwhile
Gilford Motor Company Ltd. v. Horne (1933)
Filling gaps

avoids unnecessary transaction costs in the drafting of K’s
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Facts : Horne managing director of Gilform motors until his resignation. The K had a non-competition clause. H tried to avoid it by setting up a company with shares divides equally b/w his wife and an employee, so he could carry on business within the area.
Decision : The company was a sham to avoid K obligations. Court treated Horne and his company as the same person, leading to violation of the clause and conduct “akin to fraud”

K could have been avoided by more carefully drafter clause, but it seems like a reasonable gap fill given the parties probably would have put it in if thought about it
Saskatchewan Economic Development Corp. v. Patterson-Boyd Mfg Corp (1981)
Filling gaps

avoids unnecessary transaction costs in the drafting of K’s
Facts : PB received loan from SED binding PB to not pay principal of interest on any loan for a shareholder of associated company under SED had been paid in full for its loan. Shareholders of PB then incorporated a new corp by the name of PB Fabricators and loaned money to PB in exchange for a debenture. The debenture gave PB Fabricators a first charge on inventory of PB.
Arguments :
PB said that PB Fabricaotrs was new business of PB not carried on when PB got the loan from SED.
SED sued arguing the loan repayments to PB Fabricators breached the K that they had to be paid first.
Decision : “Associated company” included a company with which the shareholders were associated so that clause precluded payments to PB Fabricators before SED paid. So the case was disposed of by contractual interpretation.

BUT, even if Fabricators not associated company, would still PCV o The shareholders of PB were using PB Fabricators to do things they had contracted not to do under the terms of their agreement – the loan by FB Fab was really a loan by the shareholders of PB o This is technically obiter but it allowed them to make Patterson and Boyd personally liable

Debenture of PB Fab subordinated to SED
Policy :
 If the court didn’t PCV, then lawyers dealing with similar K’s would have to write much more extensive clauses to corner all possible means by which a corp might avoid a K
2. Corporations formed to avoid statutory requirements
If court PCV in these cases, its arguable like gap filling – court is saying if legislature put their minds to it, they would have dealt with matter with a provision preventing a corporation to avoid this restriction/statutory obligation
British Merchandise Transport Co. Ltd. v. British Transport Commission (1961)
Addressing all possible ways corps might avoid restrictions in legislation is costly and delays legislations
Facts : Legislation permitted only one license per person. Did not permit a holder of C license to also hold an A license. BMT held a C license, and formed a subsidiary company to apply for an A license. It was refused. BMT was pissed – argued that it wasn’t the subsidiary that held the C – it as the parent.
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Decision : License refused – the subsidiary was merely a device to do precisely what the legislation said it couldn’t do.
Statutory Gap Filling Tax Avoidance
Using a corp to avoid taxes – if it’s the only reason for the corp, the court may be willing to PCV
Why? Trying to anticipate all the ways would make taxing provisions ridiculous and the Act complex.
Representation of Unlimited Liability

Misrepresentations mislead others into thinking no limited liability, the court will pierce to hold shareholders personally liable.

Theory – If voluntary claimants are aware the business enterprise provides LL for its equity investors, they can either refuse to deal with the business, or charge a premium, or get personal guarantees. This option not available if misrepresentations are made .

The happens often when a SP or partnership is made into a corp o PCV allow courts to compensate persons who are misled, and creates incentive for those transferring business to corp to inform persons previously dealt with o NOTE Statutory requirement – s. 39 PA – must give “notice” when change its constitution
Gelhorn Motors Ltd v. Yee (1969, Man CA)
Must give notice of incorporation to avoid personal liability
Facts : D’s carried on car exchange business. Began dealing with Gelhorn limited before application for incorporation. Orders for cars continues to be made after incorp. D’s were sued personally for default on payment and the Ds argued the suit should be against their corporation
Decision
: Evidence indicated that Gelhorn didn’t know the D’s had incorporated. The court disregarded the corporate entity and made the Ds personally liable
Chiang v. Heppner (1978, BC)
Facts : C left watch with Hepp for repair. Business crried on under Heppner Ltd but C got a ticket of receipt in the name of Heppner Jewellers. C tried to get watch back over next few months but it never got repaired. Store destroyed in fire, watch along with it, C sued H as being personally liable.
Decision : H held himself out as sole proprietor, the ticket gave no indication of limited company. All the P’s dealings were with him personally, and he was held personally liable.
 Although unlikely P’s decision influence by type of association, P might have had reasonable expectation that a watch repair shop would have insurance to cover losses – which it didn’t
Tato Enterprises Ltd v. Rode
Failure to comply with corporate formalities (particularly in 1 shareholder corp) increases risk the corporate entity will be disregarded
Facts : T was owed money on a written K with Scott Bradley Ltd. The K was signed on behalf of corporation by secretary and president (Rode)… but SBL didn’t exist. There was a corp called Scott
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Bradley Marketing Ltd, but no business done through it, had no bank account, no assets. Amounts that were paid were paid by Rode personally.
Decision : Rode personally liable

Tato probably assumed was dealing with corp, but still made Rode liable

Rode arguable could have avoided mistake at least cost

When you use a corporate name – make sure it’s the RIGHT name
Roydent Dental Inc v. Inter-dent Supply Co. of Canada (1993, Ont)
Failure to comply with corporate formalities (particularly in 1 shareholder corp) increases risk the corporate entity will be disregarded
Facts : P sold goods to D on credit, not paid. P did not make any inquiry into whether the D was a corporation or not. It was just an unincorporated division of another company.
Decision : Shareholder of the company still found personally liable

The shareholder failed to register the business name of the division, failed to comply with legislative formalities

P appears not to have relied – but it would have been difficult given that business wasn’t even registered

Name was also misleading that it was a corporate entity (although should NOT rely on this – common for partnership to use and Co)
Seizing upon misrepresentation in tort actions to effect compensation

Court may use failure of promoters of company to treat the company as a separate entity in order to effect compensation in tort actions

BUT tort claimants are not usually people who deal with the company in advance and thus are not mislead as to nature of entity they are dealing with o Remember Mangen and Walkovsy – had no idea

Usually the cases involve other concerns than misrepresentation but courts use rhetoric saying some other kind of misrepresentation may have occurred
 Note: courts won’t always PCV in tort cases
Wolfe v. Moir (1969)
Facts : Wolfe went skating, didn’t know Moir was LL enterprise, since the place he went was called
Fort Whoop Up. It was run by Chinook Ltd. Advertising and tickets didn’t mention Chinook. Wolfe sued Moir personally.
Decision : Moir failed to follow statutory requirements, he therefore took the risk of being personally liable.
Criticism : Nothing in statute says the consequence of not using cautionary suffix (s. 10(5) CBCA is the requirement, s. 251 says its an offence not to) is the disregarding of the corporate entity

Also, even if it did say Ltd, Wolfe still would have gone skating
Underlying Policy Reasons for PCV in tort
1.
Distributive Justice a.
The concern for compensating tort victims may explain a greater willingness of courts to pierce in tort cases
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b.
Ex. If corp assets not enough to compensate victim, may make shareholders/directors/officers personally liable to make up shorfall c.
Benefit of preserving LL might be given up for the distributive consequences of fully compensating the victim
2.
Deterrence: incentive costs and efficiency a.
Ex. – say drivers are paid on a per delivery basis – they will make speedy deliveries resulting in fast and reckless driving b.
Imposing liability and making investors pay damages could create incentive on managers to devise compensation method that takes that in account c.
Can restore incentive by overriding LL
Other ways of disregarding the corporate entity
1. Tort action against director or officer as agent of corporation

Since a corp can only act through humans, a tort committed by a corp must be committed by the act of one or more individuals

Corp is vicariously liable for tort of individuals, acting as agents – but the agents themselves can be liable also
Berger v. Willowdale AMC (1983)
Facts : B worked for FAI. Mr. F, the president of FAI instructed employees to clear ice from steps in front of his establishment. Employees failed to do so; Mr. F didn’t follow up to make sure it was done.
B then slipped getting into her car at the front of the establishment. As an employee, the remedy was worker’s compensation – but she was unhappy with the amount she got. She couldn’t seek additional compensation from the business b/c of worker’s comp legislation, so she sued Mr. F himself.
Decision :
 Worker’s comp act didn’t preclude the action

Held that Mr. F had a duty to make sure the walkway was safe for the employees

He was personally liable
Said v. Butt (1920)
When servant acting bona fide in scope of authority, won’t be held personally liable for tort of inducing breach of K
Facts : See above – Said had someone buy ticket for him (undisclosed principle)
Argument: K b/w Said and Palace Theatre – Mr. Butt denied entrance and did the action action of breach of K
Decision : Normally, undisclosed principal can disclose agency relationship and sue the 3P, however, doesn’t apply if clear the 3P would not have K with principal had the 3P known his identity

So, NO K between Said and Palace Theatre

Cited as meaning – as long as officer acting in good faith w/in scope of authority ther are not liable for ANY tort

This is wrong – it’s only for the tort of inducing breach of K
McFadden v. 481782 Ont Ltd (1984)
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If an officer/director of corp is to be relieved as an agent of the consequences of his tortuous actions of inducement (of breach of K) it is not b/c he is the company’s alter ego, but because in so acting he is acting under the compulsion of duty to the corporation
Clarifies principle in Said – only applies to tort of inducing breach of K

Must be acting bona fide w/in scope of employment, in best interests of company

As a general rule, an agent is always liable personally for his tortuous acts – only get off b/c of justification of acting in best interests of company

Thus, corporation protected for legal consequences when the director/officer acting outside scope of authority
ADGA Systems International Ltd v. Valcom Ltd (1999)
Limits Said v. Butt exception to cases involving tort of inducing breach of K
Facts : Valcom poached ADGA employees, who breached their K’s in order to work for Valcom.
Rationale : In tort of inducing breach of K, P would have a claim for damages against the corp as well as against the directors/officers/employees responsible for inducing – would get DOUBLE DAMAGES

It want to sue them have to show independent tort – doing something not in scope of authority but rather serving personal interests
ADGA suggests huge scope of personal liability for directors, officers and employees. The next 2 BC cases take much narrower approach
Rafiki Properties Ltd v. Integrated Housing Development Ltd (1999, BC)
Facts : R contracted w/ Integrated for services in the development and construction of a hotel. R alleged it relied to its detriment on false representation so Integrated and its two principles.
Decision : Cited ADGA but followed much narrower principle

Director can only attract personal liability if acting outside scope of his authority in being matorivated by personal interest contrary to interests of the company, or by fraud/malice
Better Off Dead Productions Ltd. v. Pendulum (2002, BCSC)
Facts : BOD claimed they relied on misrepresentations when they advanced funds to Pendulum. Made claim against president as well as company.
Decision
: Dismissed BOD’s claim.

There is some potential for liability even if acting in scope of authority

BUT need to have personal motivations, separate interests from the company
The Oppresion Remedy
May be able to make directors/officers liable on the basis of the corporate oppression remedy. This is allowed by CBCA s. 241 which states a court may make an order for relief on the basis that the conduct of the affairs of the corporation has been oppressive or unfairly prejudicial to, or that unfairly disregarded the interests of a “complainant” in the complainant’s capacity as a security holder, creditor, director or officer.

241(3) – wide powers for providing relief, including an order compensating the person

Order can be against a particular director or officer
Type of situation that might occur:

In closely helds, the shareholders are often the directors
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 The directors may lock in a shareholder’s investment w/o ever paying out any dividends, channeling profits out of the corp through director salaries instead

The locked in shareholder might try using the oppression remedy against the directors
PCM Contruction v. Heeger (1989)
P (a shareholder and director of the corporation) held to have been wrongfully dismissed. The corporation, however, had been reduced to mere shell. The P then brought oppressive action and the court ordered the directors of the corporation to compensate him.
Statutory provisions under which separate corporate personality avoided
Certain CBCA provisions allow disregarding of separate personality

CBCA s. 118 – gives circumstances where directors and shareholders may be personally liable o (1) for issuing shares without receiving full payment for them o (2) for purchasing, redeeming or acquiring shares, paying commissions for the sale of shares, paying dividends, providing financial assistance to, or paying indemnity to director or officer if certain tests of insolvency are not satisfied o (4) Shareholders can be liable to indemnify a director liable under (2) where they have been recipients of any of the funds

CBCA s. 119 – Unpaid wages o When corp in financial difficulties, the business may decide not to pay certain liabilities like payroll o This provision overrides any argument that the directors are not liable on the basis that the employee contracts are with the separate legal corporate entity o It says that directors are jointly and severally liable to employees for up to 6 months of unpaid wages
General Theory for Disregarding the Corporate Entity
Voluntary Relationships – Consensual Claimants

Avoid costs of transacting around avoidance of obligation – both in K’s and statutes – gap filling reduces costs

Avoid costs of gathering information – in cases of misrepresentation, if promoters were not made liable then outsiders would have to spend a lot of money information gathering to be so very careful about who they are dealing with
Involuntary or non-consensual claimants

When cost of leaving a tort victim uncompensated is greater than the benefits of LL, makes sense to overall social welfare to make exception to LL

More likely to pierce in one-person or few share holder companies b/c costs imposed by L are likely to outweigh benefits of LL

More likely to pierce when claim against LL parent company rather than shareholders o Ie, affiliated corporations – no individual investor will be made personally liable
Can use both equity finance and debt finance. Equity interest in for-profit corporations are referred to as shares.
The Nature of Shares
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 Typically described as “bundles of rights” ( McCaura ) or “bundles of interrelated rights and liabilities (Sparling)

Share is not a property right in the assets of the corp

It does not represent proportionate ownership

Potential bundles of rights are virtually infinite

Separate bundles of rights are referred to as classes – the CBCA allows for different classes of shares with different rights and restrictions (s. 6(1)(c); s. 24(4)) o When there is more than one class of shares, the rights and restrictions must be set out in the articles

Three basic rights that individual shares may or may not carry (s. 24(3)) o 1. Voting Rights o 2. Dividend Rights o 3. Right to proceeds on dissolution (after creditors and other liabilities paid off)

If there is only one class of shares, the rights of the shareholders are equal and will include each of these rights

Shares are presumed to be equal in all respects unless otherwise indicated (s. 24(3), Jacobsen v.
United Canso)

R v. McClurg – tells us what is required to make a sufficient distinction between classes o Not much distinction required for a validly separate class to exist o Class A and Class B could share certain rights – but something has to be different o Rights don’t need to be class-specific – two classes can share the same right

Each shareholder entitled to share certificate/written acknowledgement of a right to a certificate
(s. 49(1)) – must show rights/conditions/restrictions or be able to provide on request

Corporation must maintain register to record names and addresses of shareholders - s. 50
Types of Shares
Common and Preferred

Frequently used types – remember, they are bundles or rights and can be anything you make them
Common Shares

Have three main rights o Right to vote o Receive dividends when declared on a pro rata basis (subject to preferred dividend rights) o Proceeds on dissolution
Preferred Shares

Called so because they typically have a preference with respect to some right – usually preference with respect to receiving dividends

Preference with respect to dividends means that when the directory declare a dividend, the preferred shares get paid a specified amount on each share before any dividends can be paid to common shares o Ex. Have 1000 common shares and 1000 preferred shares carrying a right to $5 per share. If a dividend of 4,000 is declared, then each preferred share will get $4/share and the common shares will get nothing o If dividend of 6,000 is declared, the preferred shares will get their full 5/share and the common shares will get the left over 1/share
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o International Power Co. v. McMaster Univ (1946, SCC) o A priority claim to dividends implicitly precludes a right to share in any dividends beyond the fixed preferred amount of the preferred dividend unless expressly provided for (Participating Right)

If you say that the preferred shares have a right to $5 per share before anything paid to common, then preferred shares are limited to that 5/share. If there is a huge dividend declared, then common shares could get lots and preferred not much

Preference with respect to proceeds on liquidation means that the preferred share gets a specified amount on liquidation before any of the proceeds can be distributed to the common shareholders o Ex. There are 1,000 common and 1,000 preferred that have a right to $100 per share from liquidation. If company realized 80,000 on liquidation, all preferred would get 80 per share and common nothing o International Power v. McMaster

Presumption of equality with respect to preferred shares when it comes to share in the proceeds on dissolution

So, upon liquidation, after preferred paid, they still share the remainder with the common shares on a pro rata basis

Typical Preferred Share Features o 1. Cumulative vs. non-cumulative – a preferred share is cumulative if any dividend that is unpaid in any given year accumulates and is to be paid in a subsequent year

Above example, the preferred shares only got 4000 of their entitled 5000, so the
1/share carries over
 Non-cumulative not very common

Presumption in favor of cumulative – Webb v. Earl o 2. Participating vs. Non-participating – participation right allows preferred shareholder to participate in the distribution of dividends beyond the preferred dividend right – so that anything left over after distribution of preferred dividends, they get a share

Presumption in favor of non-participating (as in International Power )

Must be written into the articles o 3. Convertible vs. non-convertible – conversion rights allow shares to be converted into common shares at a predetermined conversion rate o 4. Retractable vs. non-retractable – retraction right allows the shareholder to sell the shares back to the company at a predetermined price o 5. Redeemable vs. Non-redeemable – redeemable is a company’s reserved right to buy back the preferred shares at a predetermined price (b/c the company may want to refinance)
Dividends
S. 43 of CBCA allows for 3 forms of dividends
1.
Cash – dividends are usually paid in cash
2.
Dividends in specie – property (usually in the form of shares in another company it owns)
3.
Stock dividend – more shares in the same company a.
Note, the assets of the company don’t change as a result of this, so what usually happens is that the value of the stock goes down so that the holder of 100 shares that gets 5 extra shares will have 105 shares worth the same as the original 100 shares b.
What the shareholder really gets is more residual rights to proceeds of same assets
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
Payment of dividends is a power of the directors (s. 102) o The directors cannot delegate the power to declare dividends (s. 115(3)(d))

Directors are not obligated to declare dividends , but they are under an obligation to exercise this power in the best interests of the corporation – and not in a way that’s oppressive to one or more shareholders o Dodge v. Ford Motor – not paying a dividend was found to be a breach of the duty to act in the best interests of the corporation o Ferguson v . Imax – power to declare dividends must not be oppressive to shareholder

Once a dividend has been declared, it becomes a debt of the company and shareholders can sue if not paid

Dividends can only be paid out of profits (retained earnings of corporation)

Dividends can’t be declared/paid if corporation is insolvent at the time or payment would make it insolvent (CBCA s. 42) o Directors can be held personally liable (s. 118(2)(c) – no “abandoning ship” o Shareholders that receive such dividends can be ordered to repay the amount to the directors (s. 118(5))
Shareholder Voting

Most important shareholder right

Shareholders with voting right can elect directors – “ordinary resolution” – directors elected by a majority of votes case by shareholders (s. 2(1) of CBCA)

Holders of voting shares have to approve changes to the articles of incorporation and on major transactions by “special resolution” – not less than 2/3 vote o The articles can require a greater majority than this provision says, but can’t do that for the removal of a director

Typically preferred shares do not carry a voting right
 Classes of shares that don’t have voting right may be given the right in particular circumstances

Presumption of one share one vote – s. 140(1) unless articles otherwise provide
Voting restriction and Equal Treatment
Bushell v. Faith (1970)
Facts : The articles of the Assoaction of Bush Ltd allowed a shareholder who was also a director to have 3 votes per share on any shareholder resolution to remove them as director. 3 shareholders –
Bushel, Bayne and Faith. Each had 100 shares. B and B wanted to remove Faith, so by show of hands it was 2 to 1. But then F was like, I get 3 votes per share because you’re trying to remove me. Making to
300 to 200 votes. B and B then applied to show F validly removed as director.
Decision : They failed. Voting provisions upheld.

S. 109 doesn’t say that the resolution must be based on one vote per share
Jacobsen v. United Canso Oil (1980) (Alta)
Facts : By-law said a shareholder could only vote a maximum of 1000 shares, didn’t matter how many shares you owned.
Decision : The by-law was not valid (per s. 24 CBCA)
 You can’t make a distinction in the number of votes per share on the basis of characteristics of the particular shareholder who held the shares

If voter rights are going to vary, this must be done through a separate class of shares
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Policy to reconcile Bushell and Jacobsen?

In both cases, only one class of shares, presumed to be equal in all respects o Yet in Bushell Faith got 3 votes while the others only got 1

In Bushell, the 3 siblings probably all consented to the provsion, but in Jacobsen less likely the shareholders consented to the transaction
 Probably shouldn’t use Bushell in Canada
Bowater Canadian Ltd. v. RL Crain Inc.& Craisec Ltd. (1987, Ont)
Facts : Craisec held common shares of Crain, carrying one vote per share. Craisec also held all of shares of another class, “special common shares”. The articles of RL Crain gave holders of special common shares 10 votes per share as long as they were held by Craisec. Only one vote per share if held by someone else. Bowater had acquired several common shares and challenged the right of Craisec to have 10 votes per share in the special common shares.
Decision : 10 votes per share valid, but can’t change on transfer
 Can’t have “step down” provision – the transferee of the special shares would have the same rights as Craisec, at 10 votes per share

S. 24 requires that rights in a class apply equally to all shares of the class , or there would be potential for fraud o Having only 1 vote per share on transfer not valid, b/c can’t treat different holders of the same share differently o This requirement is subject to separate series rights

This case may stand for the broad proposition that you have to treat all shareholders of a class equally – could have ramifications
 Many companies also have “poison pill” provisions that allow them to control takeover bids – say that (for example) when one shareholder acquires 20% or more of the shares, certain poison pill rights come into effect like allowing all other shareholders the rights to buy more shares of the corporation at a very low price o This would be invalid if Bowater stands for principles of equal treatment
Issuing and Paying for Shares
Power of Directors

CBCA s. 25(1) – subject to articles, by laws of USA, it is the directors who decide on when to issue shares, who to issue them to and for what consideration

S. 115(3) directors can not delegate this power
Authorized Limit and No Authorized Limit
 Common in past to put limit on power of directors to issue shares = “authorized” amount of shares director could issue

S. 6(1)(c) CAN set out an authorized limit in the articles, but the articles don’t need to do so o Directors can have limitless shares to give
Series of Shares

When need funding, need it quick

If decided that existing shares should be issued to raise funds, this can normally done by directors (subject to authorized limit) without delay
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
If decided that some different share rights should be offered to finance the particular venture then the directors will have to go to the shareholders to approve the creation of a new class of shares o The rights for such a class won’t be set out in the articles, and if authorization doesn’t appear, the articles need to be amended

To avoid the delay of amending articles, directors can be allowed to issue the shares of a class of shares in ”series” – s. 27

Each series of a given class of shares can be given separate rights and restrictions that may be more appropriate for marketing the shares at the time the director wants to issue them o Ex. You might have a $5 per share preferred dividend right on series 1 Class B preferred shares which are non-cumulative and non-participating. You could then create a series 2
Class B preferred shares that have a preferred dividend of $8 per share and which are cumulative and participating.

There is a risk that subsequent shareholders of a class will be treated better that the earlier series of shares of the class o CBCA tries to protect by saying no series in a class can be given priority
Corporate Debt Finance

May take form of trade credit or loans
Common Types of Corporate Debt Finance
Bank Loans

Loans are contractual arrangements
 “Line of credit” or “line of revolving credit” – for short term fluctuations in firm’s needs o Revolving allows borrower to borrow up to specified limit o Takes loan, pays down when can
 “Term Loan” – for longer periods of time o Normally involve a fixed sum to be paid at a later time with interest payments to be made on regular basis

Generally have terms to provide protection to the bank o Often don’t want borrower to engage in really risky business, so may restrict the kinds of businesses the borrower can engage in o May also require that the ratio of liability to total assets be limited to some percentage

Bank may take a security interest (collateral) over certain assets of the borrower, which can seize if borrower doesn’t pay

Common clause – “ acceleration clause
” – if the borrower defaults on any of its obligations that bank can require all amounts become due immediately
Commercial Paper, Bonds and Debentures

Notes/Commercial Paper – promissory notes which a corporation may sell that constitutes promises to pay a specified amount of money at a specified time in the future o Usually short term (30-90 days) o May be fixed amount or fixed amount plus interest

Bonds or Debentures – sold to the public to produce large amount of $ o Usually long times until maturity o No real legal distinction between the 2 terms o Often have lots of people buy them – ex. Sell $1,000 debentures to 50,000 people to raise 50 million
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o Don’t usually carry the right to vote – subject to contractual terms that are usually set out in the indenture (agreement K) o There may be terms around controls or further debt finance, or even a right to convert the bond into other securities of the corporation

Enforcement o May have problems with enforcing indenture when lots of bondholders o Common practice to appoint a trustee to enforce the terms on behalf of the bondholders or debenture holders o Otherwise, they might be hard to sell b/c investors would know that it was unlikely the terms would be enforced o CBCA has rules governing trustees

Qualification – trustee must be incorporated under and subject to controls under statutes governing the incorp of trust companies (s.84)
 Conflict of interest – trustees cannot have COI with issuer (s.83)

Access to list of debenture holders – trustees must be permitted access to list of debenture holders for the purpose of communicating with them for the purpose of voting or other matters relating to enforcement (s.85)

Trustees have power to demand evidence of compliance (s.86-88)

Trustees must give the debenture holders notice of a default by the corp (s.90)

Trustees must act honestly and in good faith for the interests of debt holders and with the care, skill, and diligence of a reasonably prudent trustee (s.91)
Securities Regulation
Setting up business – are you getting money from somewhere other than your own pocket. If yes
 securities law issue

Canada typically deals with these matters in separate securities statutes o Matter of provincial jurisdiction

Canadian Securities Administrators – group that meets to address problems created by inconsistent regulatory schemes from province to province o Create national instruments – no legal effect until prov regulatory body adopts them as a rule (regulation)

Stock Exchange Regulation – issuer of security may choose to issue securities on a stock exchange
– if so, it will have to enter into a listing agreement w/ stock exchange
Distribution of Securities to the Public

Prospectus requirement – most provincial securities acts provide that a prospectus is required when there is a “distribution” of a “security” o “Security” = not just shares and debentures but also warrants, options, rights and other instruments or transactions that have a similar investment character o “Distribution” = includes, among other things, “a trade in a security of an issuer that has not been previously issued

Distribution of securities to anyone (including yourself) – exempted if only to yourself

Trade = broadly defined to include any sale of disposition of a security for valuable consideration o Consequent scope of prospectus requirement –
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
Exemptions form the Prospectus Requirement o Small Business – “private issuer” has fewer than 50 shareholders and has only distributed securities in reliance on the private issuer exemptions
Continuous Disclosure

Provincial securities act disclosure requirements include annual info forms, financial disclosure, proxy circular disclosure, insider trading reports and timely disclosure
Takeover Bid Regulation

A takeover bid is a bid to acquire sufficient shares of a corp in order to control the management
(20% or more of the equity securities of any class of the issuer)

Poison pill plan – involve the issuance of rights to buy further shares of the issuer to existing shareholders – allows existing shareholders to acquire shares below market price
Think of this like constitutional division of powers – directors/officers vs. shareholders
Court developed doctrine – ultra vires, contstructive notice, indoor management rule
Powers of the Corporation and Authority of Directors and Officers

Common approach has been for statutes of incorporation to require that the constating documents
(memorandum of association or articles) of the corporation set out the objects and powers of the corporation o Objects of corporation – kinds of businesses the corporation would engage in

Ex. To manufacture widgets o Powers of corporation – kinds of things the corporation could do in carrying on the business

Ex. Could borrow money

Agency v. Capacity o Agent cant enter a K that the principal could not enter into himself o Authority of agents of the corp
 Actual – decisions of the directors of the corp are treated as decisions of the corp itself; officers are agents of the corp

Ostensible – They will also have ostensible authority – the authority on which 3P’s rely on when they encounter the agent o Scope of authority limited to the capacity of the corporation – director/officer can’t enter a K on behalf of the corp that the corp itself couldn’t enter
 Such K’s are ultra vires (beyond power of) the corporation

Objects and powers and the capacity of the corporation o A K entered into by a corp pursuant to a resolution of the directors/agents making a corp decision that was contrary to the objects or powers of the corp would not be legally valid, the K is void
Ultra Vires Doctrine – old C/L approach
Asbury Railway Carriage & Iron Co. v. Riche (1875)
Facts
: Memo of assoc for Asbury stated the following objects “to make, sell or lend or hire, railway plant, fittings, machinery and rolling stock”, and special resolution needed to alter this. Asbury entered
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a K with R under which R would construct a railway. Then Asbury repudiated and R sued. Asbury claimed the K was ultra vires the company
Decision : K is ultra vires, Asbury never had capacity to enter it and so K void

Contrary to the memorandum of association

K could not be ratified by USA b/c there was no K to ratify

Principle could not ratify b/c principle had no power to enter the K
Justifications for Ultra Vires
1.
Method of protecting creditors and investors against changes in risk – if a company could start carrying on businesses other than those listed in objects, those investors/creditors might be exposed to much riskier businesses than anticipated
2.
Facilitated raising of capital for quasi-public projects like roads, canals – protects against misuse of corporate funds
3.
Controlling against the risk of bankruptcy for some types of corporations
Problems with Ultra Vires
1.
Risk of non-enforcement worked against both third parties and the corporation a.
Could create harship on 3P’s who had to bear the risk that the K’s they had entered into could not be enforced b.
Could lead to unjust enrichment where the 3P has begun to perform
2.
Corporations might find K’s are not enforceable and 3P’s might be unjustly enriched
3.
Solution: either charge a premium to cover risk or check objects of corporation
Corporate Response to Ultra Vires

Wanted to reduce risk

Had lawyers draft really broad objects into clauses running several pages

Clauses would also give broad incidental powers – corporations could do almost anything
Court Response

Tended to read objects clauses broadly, give wide scope to incidental powers
Ultra Vires Continued to Cause Problems

Responses helped keep problems at bay, but there were residual costs and risks

Cost of having lawyer review extensive clauses
 Still risk that K’s might go beyond objects of a particular corpoation

Either a person contracting w/ corp of the corp itself might later regret a K and seek to avoid obligations by arguing it was ultra vires – increased litigation

Still occasions when the courts would find obligations entered were ultra vires o Re Introductions Ltd (1970)

Had an objects clause for providing services to the Festival Of Britain. The memorandum said it has power to borrow funds to pursue the objects. They got a bank loan for the purpose of a pig breeding business.

The objects clause held NOT to include this
Legislative Response

In most general statutes of incorporation, to begin to give a corporation incorporated under the statute the powers of a natural person o S. 15(1) CBCA

Then the statute would allow the business or powers of the corporation to be restricted in the memorandum or articles
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o S. 16(2) “a corporation shall not carry on any business or exercise any power that it is restricted by its articles from carrying on or exercising, nor shall the corporation exercise any of its powers in a manner contrary to its articles”

Statutes went on to provide that while an act of the corporation might be invalid for other reasons (duress) they would not be invalid merely by reason that the particular act was contrary to a restriction on the business or powers of the corporation o S. 16(3) o Overrides the ultra vires doctrine

If the directors/officers of a corp cause the corp to engage in a business or exercise a power restricted by its articles, the shareholders can take remedial action o S. 247 – may seek restraining order from further transgressions

Under this, court can also order anything else it sees fit o The directors would have been acting beyond their authority and would be subject to an action by the principal (corporation)
 Although the directors are the ones who have power to bring action for the corporation so… o The CBCA provides for an action by the corporation initated by the shareholders

Derivative action – s. 238, 239 o Or – oppression remedy
NOTE: The ultra vires doctrine does not apply/has never applied to Crown Charter or letters patent companies (b/c always had powers of a natural person)

The ultra vires doctrine not completely gone

Only applies to corporations incorporated under general statutes of incorporation that have those provisions

And the CBCA still has some restrictions on companies o S. 3(4) – no corporation can carry on business of band, insurance company, trust and loan company

Ultra vires doctrine may apply to some corporations o Formed under special acts (like “Act to Incorporate Vancouver Hospital” o These acts often do set out objects and powers of the corporate entity they create
Constructive Notice
 The memo and articles would often set out “limits on power” of the directors to carry out activities that are within the capacity of the company o Don’t confuse with ultra vires – acts that are beyond the capacity of

Because memo and articles are publicly filed, third parties are deemed to have knowledge of constraints on exercise of power (creates additional risk for 3P’s) o So if they provided for constraint, 3P’s deemed to have knowledge of it
Indoor Management rule

Limited the constructive notice doctrine
 3P’s not deemed to know of any indoor/in-house restrictions on the authority of directors or officers (if documents are not publicly available then constructive notice doesn’t apply)
Legislative Modifications

Generally, do away with constructive notice doctrine

CBCA s. 17 – No person is deemed to have notice or knowledge of the contents of a document concerning a corporation by reason only that the document has been filed by the Director or is available for inspection at an office of the corporation o Brings it back to – was reliance reasonable?
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
CAUTION: the constructive notice and indoor management rules might silly apply to some extent o Again, only for corporations incorporated under those particular statutes
Roles of Directors and Officers
The Role of Directors

Directors manage (or at least supervise the management of) the corporation ( subject to any unanimous shareholder agreement )(s.102 CBCA) o S. 102(1) and 146 – USA can reallocate management control from directors to shareholders

Normally have the power to appoint the officers of the corporation (s.121) – the officers usually conduct the day-to-day mgmt of the corp

Election of directors is primary method by which shareholders exercise some control over mgmt
Qualification Requirements for Directors

S.105 CBCA – directors must be: o (i) natural persons (individuals, not corporations); o (ii) over 18 years of age; and o (iii) not adjudicated mental incompetents or bankrupts
 s.105(2) – a director need not own shares of the corporation (although it does allow for share qualification in articles)

Minimum number of directors for corporations that does not publicly distribute shares = 1 ; corp that makes a public distribution = 3 (s.102(2)) – no max number of directors

S.105(3) – at least 25% of directors must be “resident Canadians
” (where < 4 at least one must be) o Resident Canadian is defined in s. 2(1) – includes citizens of Canada ordinarily resident in
Canada, landed immigrants, and certain citizens that are normally abroad

One document that must be sent to the Director to form the corporation is a notice of the first directors of the corporation (s.106(1)) – these first directors hold office until the first annual meeting (s.106(2)) which must be held w/in 18 months of the incorporation ( s.133(1))

At every subsequent annual meeting, directors are elected by an “ordinary resolution” of the shareholders (majority vote) (s.106(3))

cannot be altered or waived in articles o Election of directors one of most important things on which shareholders vote – primary method shareholders have to control management o May start proxy contests – when your shareholding so small won’t influence, people might try to acquire your voting rights
Term of Office

Director begins from time of election and ends at the subsequent annual meeting – however articles may provide for term up to 3 years (s.106(3)(5)) o No limit on the number of times a director can be re-elected – if no one new re-elected, current directors remain

S.106(4) – articles may provide for staggering boards (not all directors need be elected at the same meeting) (have 9 directors but only elect 3 each year)

S.145
– a corp, shareholder, or a director may apply to court to resolve any controversy concerning the election or appointment of a director

S.108
– a director ceases to hold office when he dies , resigns , becomes disqualified or is removed upon a resolution of the shareholders
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
S.109(1) allows for the removal of a director by ordinary shareholder resolution o Bushell v. Faith
– suggests that in some circumstances the requirement for a majority might be avoided

S.111(1) gives directors power to fill vacancies on the board o From death or bankruptcy o Mainly because calling special meetings is hard and expensive when there are lots of shareholders

S.109
– shareholder can remove a director by ordinary resolution and can be filled at the same meeting
Authority and Powers of Directors
Important to note which powers directors have and when those powers can be reallocated to the shareholders (by-laws, articles, USA’s) – important for closely held corporations

Management power (s.102) o Broad power – operates as a sort of residual power o These are all subject to USA o Several powers that fall within s.102
are highlighted in s.115(3) (cannot delegate these, can only be taken away in a unanimous shareholder agreement): i.
Submission to the shareholders of any question or matter requiring approval of shareholders; ii.
Declaration of dividends; iii.
Purchase, redemption or other acquisition of shares issued by the corporation; iv.
Approval of a management proxy circular; v.
Approval of a takeover bid by the corporation or directors’ circular (prepared in connection with a bid to takeover the corp.); vi.
Approval of any financial statement put before the shareholders

Subject to articles, the bylaws, or a unanimous shareholder agreement: o The directors have the power to adopt, amend or repeal bylaws by s. 103
 This is a default allocation, and this can be reallocated to shareholders

103(2) says that any by-laws the directors want to mess with won’t be effective until put before and approved by shareholders t the next meeting o Power to borrow ( s.189(1) ) and power to delegate borrowing power ( s.189(2) ) o Power to issue shares ( s.25
) and power to issue shares in a series ( s.27
) o Directors MAY appoint (if articles provide) additional directors ( s.106(8) )

This is limited – can only appoint 1/3 of the # of directors elected at the previous annual meeting o Filling a vacancy on the board of directors that arises due to death or resignation of a director ( s.111
) or due to shareholders not replacing director ( s.109(3) ) o Filling a vacancy in the position of auditor ( s.166(1) ) unless articles stipulate position of auditor can only be filled by a vote of the shareholders ( s.166(3) ) o Calling of meetings of shareholders ( s.133
) o Appointment and compensation of officers and the delegation of powers ( s.121
) o Power to determine remuneration for the directors, officers, and employees of the corp
( s.125
)
Scope of Directors’ Power to Delegate their Powers
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
Directors can appoint a managing director or committee of directors and delegate to them any powers not listed in 115(3)

Directors may not delegate all of their powers ( s.115(3) ): filling a vacancy among directors, issuing securities, declaring dividends, purchasing, redeeming, or otherwise acquiring the shares issued by the corporation, or adopting, amending or repealing by-laws of the corporation
Hayes v. Canada-Atlantic & Plant SS Co. (1910 – American case but good law)
Prior to enactment of s.115(3) – court still restricted delegations of power o On theory that there was an implicit limit on their power to delegate or excessive delegation was contrary to public policy
Unrelated to this – there was a question of what jurisdiction’s law should be followed o Held it was a Canadian company in America, so Canadian law applies – “ statutory domicile
” rule – law governing is the law of the jurisdiction in which the company was incorporated
Decision: the directors could not delegate all their powers and put up a new management in lieu of that formally established by the shareholders (could not delegate removal of persons from office, compensation of officers and calling of shareholder meetings)
Sherman & Ellis v. Indiana Mutual Casualty
Highlights how powers of the directors might be delegated through management contracts
Decision : a corporation can delegate certain managerial duties to strangers for a limited period (not indefinitely)

Delegation here was contrary to public policy, b/c: the time frame was too long, and it delegated all of the powers of management
Kennerson v. Burbank Amusements Co.
Facts : Burbank hired Kennerson to manage all matters – new board of directors resolved to cancel the contract. Kennerson sued for breach of employment K
Decision : the problem is one of degree – if the K attempts to delegate substantially all corporate powers to an agent, it has gone too far
Policy : sold shares to shareholders with ability to elect directors – directors have delegated all power and now shareholders must incur cost to call meeting to reelect directors
 S.115(3) sheds some light on the limits of the directors’ power of delegation

Cases Suggest: o Directors cannot delegate all of their powers o How far one goes in delegating their powers is a matter of degree o Longer the period of time they delegate, the greater likelihood delegation is improper o The greater extent of delegation, the greater likelihood delegation is improper

The cases are still relevant in jurisdictions where the corporate statue does not address the scope of delegation – still might also be relevant for a CBCA company (complying w/ restrictions in s.115(3) and delegating all other powers for 50 years might still be considered improper delegation)
Removal of Officers

Directors appoint them by s.121, and may remove officers
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
Power to remover officers is key to the effectiveness of the election and removal of directors as a shareholder control device

Trade –off between preserving the removal of managers as a shareholder control device and providing managers with long-term K’s and compensation in event long-term K is terminated

Important that a manager develop human capital, but there is little incentive for the managers if they may fired at any time without compensation for their investment in human capital

Long term contracts may be mutually beneficial o Reliance of employee o May accept lower pay in return for security of long term – in which case will have more incentive to build firm specific human capital o Corporation will benefit from a more effective manager
Re Paramount Publix Corp. (1937, US)
General approach has been to uphold long-term contracts – manager may be dismissed, but damages must be paid
 Didn’t want employees dismissed with no cause or consequence

Court suggested that a person could be removed from office without consequence – it would only be if person was dismissed entirely from their employment that the usual consequences of breach of an employment K would arise

Constructive dismissal : o Montreal Public Service Co v. Champagne – C hired as general manager subject only to
“such direction and control as it is the duty of the directors to exercise”. However, president was later appointed and Champagne was placed under the direct supervision

court held
Champagne was entitled to damages for breach of K o Shindler v. Northern Raincoat Co. Ltd.

Facts : S was managing director and controlling shareholder of Northern. Sold his shares to Lloyd Retailers, a public corporation. Lloyds agreed to retain him as managing director for 10 years. Lloyds then decided to sell to another company who did not want S as managing director. So Lloyds shareholders removed him.

Decision : He was entitled to damages for wrongful dismissal
 Principle : where a party enters into an arrangement whose effectiveness requires continuance of an existing state of circumstances , there is an implied engagement on his part that he shall do nothing of his own motion to put an end to that state of circumstances

Trade off between replacement of management and job security o Cases indicate a tendency to uphold long-term employment K’s – may be motivated by the reliance of the employee o May give employee incentive to build firm specific human capital o Long run effect of allowing dismissal without consequence would be that companies would not be able to enter into these kinds of K’s and might well end up having to pay higher compensation to compensate for the lack of security in the job

Parachute Provisions (Policy considerations): o Golden Parachute – lucrative compensation for corporate executives should they be dismissed from their job o Tin Parachute – extravagant parachutes struck down (by the US courts) and replaced with less lucrative K’s
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o Reduce incentive of management to resist takeovers – b/c managers would not get compensation as good as severance package – allows management to be replaced when performing poorly
Directors’ Meetings

The details of directors’ meetings are left to the bylaws of the corp

The little statutorily requirements are found in s. 114

(1) – subject to bylaws/articles directors may meet at any place

(2) – subject to articles/bylaws the quorum is a majority of the board or a majority of the minimum number of directors in articles

(5) – if meeting will deal with any matters set out in s.115(3), notice of the meeting must specifically indicate that – otherwise no requirement to specify the purpose

Meetings by conference call or other electronic means (s.114(9))

(8) permits a corporation to have one director and in that case, that director may constitute a meeting

It is not necessary to hold a meeting where all of the directors sign a written resolution in lieu of the meeting (s.117) o Common in closely-held corps
 CBCA does not prescribe how frequent directors’ meeting should be – although, at some point failure to hold meeting might give rise to liability for breach of the duty of care under s.122(1)(b)
How Boards of Public Corporations Operate
 Directors in the 1970’s and 1980’s: o Myles Mace (1971/1979) found that in the US boards of directors of publicly held corps did not manage the corps and did not have much of a role in setting the corp strategy or in monitoring the performance of management o Conference Board of Canada Reports 1977 and 1984 noted that management often controls the board rather than the other way and the board’s effectiveness is often a function of the president’s desire for/tolerance of its informed input, boards are excessively hesitant to fire top management, and a person with a full-time job cannot adequately attend to directorship duties if he holds more than 2-6 directorships

Eisenberg Suggestion that Boards Monitor the President (1976)– there to select, monitor and if needed, remove president

American Law Institute Reports recommend that a majority of the directors of public corporations be independent of the management of the corporation (1982)

Saucier Report (2001) suggested there are 5 functions of the board (p.193 Keith)
Board Structure Requirements under CBCA : o S.102(2) requires that at least two directors of a public corp not be employees or officers of the corporation or any of its affiliates (mandatory) – however, it does not require that the majority of the directors be “outside directors” (may not be entirely independent)
Securities Regulatory Corporate Governance Requirements for Public Corporations o When a corp goes public in Canada it is common to list on the TSX or Toronto Venture
Exchange o To list on the Exchange, the issuer of securities must enter into a listing agreement under which the issuer agrees to comply with the rules, bylaws, and policies of the Exchange
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o National Instrument 58-101 – requires that when a corp that had distributed securities to the public it must include certain specified disclosure on its corporate governance in its management info circular o National Policy Instrument 58-201 – guidelines given on what good corporate governance is (composition of the board, board mandate, orientation and continuing education, code of business conduct and ethics, nominating committee, compensation committee, regular board assessments, and enforcement)

Strengthening outside director requirements under the CBCA – if having majority of outside directors resulted in better quality management then why don’t corporations adopt such a strategy?
Shareholder Voting Rights

This chapter notes the powers of shareholders through voting at meetings

Shareholder powers are set out specifically in the CBCA

CBCA creates a separation of powers between directors and shareholders (with directors’ residual power as well)
 The directors are also given a “residual” power – to manage or supervise the management of the corporation

Some powers are mandatory : like the shareolders powers to elect directors, approve amendments to by-laws, approve fundamental changes such as: changes to articles, an amalgamation, continuance, sale, lease, or exchange of all or substantially all of the corp’s assets, and dissolution

Some powers are default o Lots of powers for directors can be reallocated to shareholders (USA, by-laws, articles)
Shareholder Powers
Note – only get to vote if you have the voting right by your share
1.
To elect directors a.
At annual shareholder meetings b.
They get elected every year (subject to the articles)
2.
Approve amendments to by-laws a.
Directors have right to initiate by-law changes, but must be ratified by shareholders b.
This is default arrangement, can vary with articles, by-laws, and USA c.
Also, shareholders can make proposals for changes in by-laws (s. 103(5))
3.
Approve fundamental changes a.
Must have “special resolution” – 2/3 of the votes
Shareholder Control over Director: Shareholder residual powers?

Directors have the power to manage (s.102) and normally do so by delegating the day-to-day management to officers whom they appoint

Shareholders do not manage the company

Shareholders do not have the overriding residual power to dictate to directors how to manage the company
Automatic Self-Cleansing Filter Syndicate v. Cunninghame (1906)
Facts : articles said the directors had the power to manage including the power to do all such things the company could do that were not required to be done by the shareholder’s meeting. Directors had power to sell, lease, etc for the property of the company. Shareholder wanted the assets of the company to be sold. Arranged a K for it, and got shareholders to meet and approve – by 55%.
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Directors didn’t think it was in the best interests of the company, and did not execute it
Decision
: Directors didn’t have to sell

There needed to be an extraordinary resolution

The directors are not agents of the shareholders – they are agents of the company o All depends whether it is a power of the director – if it is, shareholders cannot dictate
 Shareholders can’t dictate management to the directors

Shareholders have power in cases of a deadlock on the board of directors to appoint new directors
( Barron v. Potter )

S.173
– amendment of the articles – “special resolution” is required to amend the articles (only for shares with voting rights): o change the corporate name o change the registered office o change in a restriction on the business of the corp o create a new class of shares o increase or decrease the number or the minimum or maximum number of directors o change restrictions on share transfers
 Other fundamental changes requiring “special resolutions” (ie. Shareholder approval): o to improve an amalgamation of the corp with another corp (s.183) o the sale or lease of all or substantially all of the corps assets (s.189(3)) o a continuance of the corp under the laws of another jurisdiction (s.188) o a liquidation and dissolution of the corp (s.211)
 A “special resolution” = two-thirds of the votes cast in respect of the particular resolution (s.2(1))
Policy for limiting shareholder management power
1.
Efficiency – cumbersome if day to day decisions in hands of shareholders
2.
Maintain cohesive plan – would be hard if constantly being overridden
3.
Minority shareholder protection
4.
Avoid side payments from management to shareholders to discourage them from pursuing a particular action
Class Voting Rights

Whether or not shares have general voting rights, they may have a right to vote as a class in certain situations o Shareholders are given protection against changes in their share rights without their approval o Protection against the creation of rights for other classes of shares that would prejudice their share rights (done by giving classes of shares class voting rights) o Under CBCA the class voting right is mandatory and cannot be taken away

Situations when class voting rights arise: o CBCA s.176(1) sets out situations in which a class vote is required
 Increase or decrease authorized limit on a class of shares

Where there is an exchange, reclassification or cancellation of shares, to add, change or remove rights, privileges or restrictions on a class of shares, to increase rights or privileges of any class of shares having rights equal to or superior to the shares of such class

To create a new class of shares equal to or superior to a particular class

To make an inferior class of shares equal or superior to a particular class
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
If a series of shares is affected by a resolution in a manner different from other series of the class then the series of the class will also have the right to vote separately as a series (s.176(4))

S.176(5) – the shares of a class having a right to vote carry the right to vote whether or not the class otherwise carries the right to vote (s.176(1) things)

S.176(6) – a separate resolution of the class is required and the resolution must be a “special resolution”

Class voting rights often arise in other fundamental changes: o on an amalgamation (s.183(4)) ** if the amalgamation contains an agreement that … o a sale, lease or exchange (s.189(7)) o a liquidation and dissolution (s.211(3))
 class vote might also arise on a continuance to the extent any change were to occur in the relative rights of the classes of shares on the continuance
1. Note the typical characteristics of closely-held corporations and the reasons for treating them differently than widely-held corporations.

Characteristics: o Relatively few shareholders; o Shareholders are generally active in the management of the business; o No established market for the shares of the corporation; and o Usually a restriction on the transfer of shares.

B/c of characteristics, they are treated differently

Reasons for Different Treatment: o Large stake –
 shareholders in a closely-held corp tend to have substantial investments in the corp
 they have a much greater incentive to be involved in monitoring the management of the corporation (usually through being involved in the management themselves).

With fewer shareholders wanting to be involved in management it may make sense to have more of the day-to-day decisions in the closely held corporation in hands of shareholders o Separation of ownership and control problem not as severe –
 the problem of shareholder rational apathy (they don’t care to vote b/c they believe their vote wont make any difference and the potential loss is not worth the effort to understand the corporation) due to having a small stake and being inclined to freeride on monitoring efforts of others is not nearly as significant a problem in a closely held corporation.

Shareholders will be inclined to take steps to inform themselves and to exercise their voting rights. o Desire to control who one is in business with –
 without an established market the shareholders investment will be difficult to liquidate.
 Shareholders will not want to be in business with others they don’t trust so they tend to want control over who they are in business with and tend to want to put in share
 transfer restrictions
Statutory Definition of Closely-Held Corporation

Drafters of the CBCA took a functional approach
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o Overall question being whether the particular mandatory provisions outweigh the benefits

Recent amendments to the CBCA moved away from functional towards a global definition o Whether the corporation is a “distributing corporation ” = a corp that has made a distribution of its shares under a prospectus or similar disclosure doc pursuant to provincial securities laws
3. Note at least three modifications to the CBCA with respect to closely-held corporations.

Waiver of notice to meetings – corp does not have to provide notice to a shareholder for a meeting if the shareholder has waived her right to notice (s.136)

One shareholder meeting – s.139(4) expressly recognizes one shareholder meetings (one or more persons can incorporate a company – possible to have a one shareholder company)

Unanimous consent in writing to resolutions in lieu of meeting – s. 142 – most likely to be feasible in corporations with relatively few shareholders

Dispensing with an auditor – s.163 allows a corp to dispense with requirement of appointing an auditor where the corp is not a distributing corp

No requirement for an audit committee where the corp is not a distributing corp (s.171)

Avoidance of management proxy solicitation requirement – mandatory solicitation of proxies by mgmt is not required where the corp is not a distributing corp (s.149)
4. Note the reasons for the use of shareholder agreements under the CBCA.

Shareholders can enter into agreements as to how they will vote their shares (s.145.1)

Can allow shareholders to increase their collective voting power and potentially exercise control over the corp

Used to make sure certain persons continue to be elected director in the corp or otherwise have involvement in the management of the corp

Shareholders in a closely held corp can agree to vote their shares to make each other directors of the corp – however, cannot agree on how they would vote as directors ( Ringuet v. Bergeron ) o Directors have duty to act in best interests of company – can’t bind themselves in advance when they don’t know if it will be in best interests of company

Unanimous shareholder agreement all management powers of directors to be reallocated to shareholders (CBCA s.146 and s.102) o Because must be unanimous, usually just happens with closely-held o
5. Note and explain the reasons for share transfer restrictions in shareholder agreements.

To control transfer of shares in order to: o Avoid undesirable business associates ; and o Preserve relative interests

To allow transfers so that the shareholders have some market for their shares (sell to each other)

To have a mechanism that allows a shareholder to be forced out to resolve a deadlock or to get rid of a person who others in the company can no longer deal with

Used to provide a transfer of shares on the happening of particular events (forced/option) o Shareholder death – provision that forced a transfer or option for remaining shareholders to buy out the shares of the deceased shareholder o Spousal separation – where shares are part of the division of property o Bankruptcy – cannot contribute to further financing or contribute to paying back the bank loan on personal guarantee

To provide a mechanism for establishing fair price for the shares – otherwise may be forced out or forced to sell at a very low price
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
Validity – Edmonton Country Club v. Case held that although there is a presumption that shares are freely transferable, the transfer of shares can be restricted . Share transfer restrictions are generally valid with possible exception of an absolute restriction

Types of Share Transfer Provisions o Absolute – restriction does not allow any kind of share transfer
 Prevents undesirable business associates

Prevents shareholders from squeezing out another shareholder

No ability to deal with deadlocks
 Does not allow shareholders to get their money out o Consent – share transfer provision allows shares to be transferred on the consent of certain persons (usually board of directors which often consists of shareholders)

Allows shareholders to sell shares and get out of business

Helps avoid intro of undesirable business associates

Helps preserve relative interests of shareholders especially if the consent required is unanimous
 Could help resolve a deadlock as long as one or more shareholders is willing to sell

Not effective at resolving deadlock unless shareholders are willing to cooperate

Weak in providing a market for shares

Can force shareholders departing to accept very low price for shares o Shot gun share transfer restriction – person who receives an offer has a right to either accept the offer or impose the same offer on the initial offeror

Provides for a cheap means of setting a fair price

Although may have a disadvantage – if the offeree is financially unable to acquire the initial offerror’s shares, it can put the initial offeror at a significant advantage o First option provision – shareholder can arrange for an offer from a third party but must then put the offer before other shareholders who have a right to buy a proportionate amount of the selling shareholders shares on the same terms

Allows non-selling shareholders to keep out a third party o Forced buyout – allows for shareholders to remove another who they don’t get along with o Event options – acquisition of a shareholder’s shares on the happening of a certain event
(bankruptcy, separation of divorce, death) o Price Determination – agreement normally provides for a means of determining value for the shares
83