Corporate Form: Organizational Matters

The Corporate Form: Organizational Matters

• A corporation is a separate legal entity treated as a legal person.
• Shareholders are not responsible for a corporation's debts or liabilities.
• The Salomon v Salomon Ltd case established the principle of limited liability for corporations.

Objectives

• Understanding a corporation as a legal person.
• The distinction between federal and provincial incorporation.
• How a corporation's name is selected.
• The process of creating a corporation.
• Methods of corporation financing.
• Securities regulation.
• Share structure of a corporation.

Stakeholders in the Corporation

• Stakeholders: Individuals or groups with an interest in the corporation.
• Internal stakeholders: Shareholders, directors, and officers.
• Officers: High-level managers appointed to manage day-to-day operations.
• External stakeholders: Customers, employees, creditors, and government.

Pre-Incorporation Issues

• Decisions to be made before incorporation.
• Federal or provincial incorporation.
• Choosing the type of shares.
• Naming the corporation.

Provincial and Federal Incorporation

• Both levels of government enact legislation for company incorporation.
• Federally incorporated corporations have rights to conduct business in all provinces.
• Provincially incorporated corporations can only operate within their province of incorporation unless licensed in other provinces.

Shares and Shareholders (Part 1 & 2)

• Shares represent ownership interests in a corporation.
• Shareholders do not control or manage a corporation.
• Share structure details the class of shares, shareholder rights, and number of shares a corporation will issue.
• Basic shareholder rights include voting in directors' elections, receiving declared dividends, and a share of the proceeds from dissolution (after creditors are paid).

Availability of Shares (Part 1 & 2)

• Widely held corporations: Shares are traded on stock exchanges.
• Closely held corporations: Shares are not publicly traded.
• Closely held corporations are often referred to as "private corporations" and may have limited shareholders
• Regulations regarding share transfer vary between widely held and closely held corporations and often are a provision in the incorporation docs

Who May Own Shares?

• Freely transferable, unless restricted.
• Closely held corporations may have provisions requiring director or majority shareholder approval before transferring shares.
• "Right of first refusal" provisions might allow insiders to purchase shares before outsiders.

Business Application of the Law (Part 1&2)

• Rogers Communications and dual-class shares illustrate the complexities of controlling a publicly-held corporation even with limited shareholder ownership.
• Detailing how Ted and Edward Rogers structured their corporation.

A Corporate Name (Part 1&2)

• All jurisdictions require a distinctive name or number.
• Names must not mislead or confuse with existing businesses.
• Including legal identifiers, such as "Inc," "Ltd," "Corp."
• Concerns to be accounted for when choosing a name of a corporation, such as similar names of other businesses
• Liable for damages when there is confusion

Case 15.1

• Aquatera Utilities and Aquaterra Water's name dispute highlights name similarity issues and the role of the corporate registrar.
• The decision highlighted the importance of distinctiveness in corporate names and the ability of creditors, using the courts, to challenge business practices.

The Process of Incorporation (Part 1&2)

• Procedures for business incorporation vary across jurisdictions, but the core concepts are similar.
• An incorporator initiates the process.
• Essential documents; like articles of incorporation, define the corporation's fundamental characteristics and are a foundational document for the corporation's operation.
• The incorporation process includes submitting documents, a notice of registered office, a notice of directors, and potentially an NUANS report (to ensure similar business names have been considered or aren't being created).

Organizing the Corporation

• Directors meet to establish bylaws (operating procedures).
• Directors adopt forms of share certificates.
• Directors authorize the issue of shares and securities.
• Directors appoint officers.
• Establishing banking arrangements.
• First shareholder meeting within 18 months of incorporation.

Financing the Corporation

• Corporations can secure funding through debt or equity.
• Debt financing involves borrowing money, issuing bonds (or debentures) and could involve a lien against company assets
• Equity financing includes selling shares, giving investors ownership.
• Conversion rights can turn one security into another.

Business and Legislation (Part 1&2)

• Crowdfunding is a means of raising capital from a large number of individuals, often through online platforms.
• It is often used to fund start-up ventures or businesses.
• Provides different financing models: donation-based, lending-based, and investment/equity-based financing models.
• The 2021 CSA approval of a harmonized national framework has increased the amounts that eligible issuers can raise during a 12-month period and the maximum amount individual investors can invest.

Securities Legislation.

• Objectives of securities legislation.
• Establishing a mechanism for security transfers.
• Ensuring investors have access to information to make proper decisions.
• Promoting public confidence in the securities marketplace.
• Regulating participants in the securities market to prevent misconduct
• Removing/punishing those engaging in misconduct or noncompliance with rules.
• Three basic requirements for all Canadian securities regimes (registration, disclosure, and restrictions on insider trading.
• Prospectus document requirements.
• Continuing obligations to keep the public informed.
• Investors have a statutory right of action.

Case 15.2

• Highlights the role of continuous disclosure regime and the circumstances when investors can successfully sue in case of inaccurate information revealed by the company

Insider-Trading Restrictions

• Insider trading occurs when insiders use material, non-public information to profit from securities transactions.
• Insiders must disclose any trades.
• Insiders must not pass on information to tippees.
• Criminal penalties exist for insider trading and tipping offences.

Case 15.3

• Highlights the importance of complying with regulations on insider trading and the legal implications for individuals engaging in such conduct
• Significant penalties from the OSC (Ontario Securities Commission) were imposed for illegal insider trading by a prominent lawyer and investment advisors.

The Corporation Defined Liabilities in Tort (Part 1 & 2)

• Legal person under the law; accountable for its actions.
• Primary liability: Corporation's direct responsibility for a tort.
• Vicarious liability: Corporation's responsibility for the torts of its agents or employees.
• Identification theory: Liable when the person committing the wrong is the corporation's directing mind.
• Director's and officer's are generally the directing mind.

Corporate Liability: Liability in Contract.

• Agency law governs when a corporation is liable for a contract
• The corporation is usually bound by a contract if the acting agent of the corporation had actual or apparent authority.
• To avoid personal liability, the person signing documents on behalf of the corporation must clearly indicate they're representing the corporation and not acting in a personal capacity.

Corporate Liability: Criminal and Regulatory Liability (Part 1 & 2)

• A corporation can be liable for criminal or regulatory offences.
• Identification theory applies to criminal law, finding a corporation guilty when a directing mind committed the offence.
• Criminal liability can extend to senior officers of corporations when misconduct, intentionally benefiting the corporation, results in harmful or unsafe conduct resulting in injury or death. The same concept can apply with negligence.

Business Application of the Law (Death in the Workplace)

• Cases highlight the importance of corporations adhering to safety standards.
• In the case, a senior officer was found guilty because practices and procedures were inappropriate.
• Penalties include fines and imprisonment.

Corporate Liability: Regulatory Offences

• Corporations face liability for offences against the public interest.
• Areas of potential liability.
  • Taxation
  • Human rights.
  • Pay equity
  • Employment standards.
  • Consumer protection
  • Unfair or anti-competitive business practices
  • Occupational health and safety
  • Environmental protection

Directors and Officers

• Directors are elected by shareholders and manage the corporation's affairs.
• Directors have legal powers and obligations.
• Directors appoint officers to exercise their powers.
• Directors are ultimately responsible for corporation management.

Business and Legislation (Corporate Governance and Diversity)

• Canada now requires certain public corporations to disclose diversity information beyond gender.
• Applies to corporations incorporated under the CBCA with publicly traded securities.
• This is a comply or explain regime.

Duties of Directors and Officers

• Fiduciary duties:
  • Act honestly and in good faith.
  • Cannot favour one shareholder group over another.
  • Cannot allow personal interest to conflict with duty to the corporation.
  • Cannot intercept a corporate opportunity.
• Duty of self-dealing contracts - Duty to avoid self-dealing and ensure that contracts between directors, officers, and third parties aren't at the expense of the corporation.
• Duty of corporate opportunity - Directing minds must avoid opportunities that may benefit themselves instead of the corporation.

Landmark Case 16.1

• Highlights directors' fiduciary duty to the corporation and the consequences for breaching that duty, including the legal recourse for creditors.
• Case highlights when fiduciary duties of directors are owed to stakeholders over a corporation, especially creditors.

Ethical Considerations (Part 1 & 2)

• Corporate social responsibility has become an important business practice.
• Consideration of multiple stakeholders (employees, suppliers, customers, communities, etc.) is essential.
• The 2019 amendment further emphasizes the importance of taking into consideration the long-term interests of the corporation, the environment and other stakeholders.

Duty of Competence

• Directors and officers must exercise the care, diligence, and skill expected of reasonably prudent people.
• Duty to be competent when performing duties related to the corporation.

Case 16.1 (Part 1, 2, & 3)

• Highlights the duty of directors towards the corporations they govern, particularly in instances of poor financial performance.
• Shows how the Wise brothers breached their duty of care to the company that they controlled, to creditors and the business as a whole.
• Demonstrates the legal recourse of the creditor (and trustee) to challenge the directors’ poor business decisions.

Liabilities of Directors and Officers (Part 1, 2, and 3)

• Generally, a director's misconduct is attributed to the corporation.
• Exceptions may exist (e.g., acting outside duty or for personal gain).
• Personal liability may occur if a director acts outside their authority and takes personal advantage, or ignores a legal obligation, such as, for example, failure to remit taxes.

Case 16.2

• Highlight the regulatory and legal ramifications for a corporation breaching safety regulations and the personal liability that can arise for directors.
• Demonstrates how a director can be held personally liable if their negligence or oversight leads to violations of regulatory requirements.

Business Application of the Law (Avoiding Risk of Personal Liability)

• Directors can use practices to reduce risk of personal liability.
• Regularly attending directors’ meetings, having knowledge of relevant materials, and asking questions and being prepared can help with risk mitigation, which will in turn assist with being legally prepared and knowledgeable.
• Ensure a written indemnification agreement is in place.
• Directors should maintain D & O insurance to protect themselves from claims of liability.

Shareholder Liability (Part 1 & 2)

• Shareholders generally do not assume significant liability for corporation actions.
• Exceptions exist if the corporation is a "mere facade" with complete control by a shareholder for the purpose of fraud.
• "Lifting the corporate veil" is when the court holds that the corporate structure is insufficient to protect a shareholder (or others involved, such as creditors) from liability stemming from misconduct.

Case 16.3

• This is a situation where the court did NOT lift the corporate veil and the shareholder was not held liable.
• Highlights circumstances where the court refused to hold the shareholders responsible for the company's legal liabilities.

Business Application of the Law (Managing Risk Through Shareholders' Agreements)

• Agreements to outline terms between parties with ownership interest, and what to do if those interests clash.
• Agreements to outline the management of the company.
• Agreements to protect the minority owners or those with a lesser amount of interest in the company.
• Agreements to provide a market where the shares can be sold or purchased by those parties.
• Agreements to outline capital contribution.
• Outlining a plan for dispute resolution and resolving problems between the parties.

Creditor Protection (Part 1 & 2)

• Corporations are responsible for their debts and liabilities, and shareholders can't strip away assets to avoid paying creditors.
• Creditors have priority over shareholders in the event of insolvency.
• Laws and statues are present to prevent abusive tactics toward financial stability or those in debt with the corporation.

Termination of the Corporation

• Corporations can be terminated through winding up; a complex process dealing with the dissolution of the corporation.
• A corporation can be terminated by default if they fail to submit documents for the purpose of maintaining or supporting the operations of the business.
• The court can order termination under some circumstances.
• Insolvency will also lead to termination.

Introduction to Property Law

• The meaning of property (tangible and intangible).
• Different forms of property, including real and personal.
• How property is acquired (e.g., purchase, lease, invention, etc.).
• Legal rights and obligations associated with owning property.

Categories of Property

• Real Property: Includes land and permanently affixed items.
• Personal Property: Everything else (movable/intangible).

Real Property, Aboriginal Title

• Real Property, especially land, has various legal interests, including fee simple (full ownership), mineral rights, leaseholds, life estates, and condominiums.
• Aboriginal title rights exist in Canada recognizing the pre-European historical land claims of Indigenous peoples.
• These rights entail many ongoing court cases.
• These rights are distinct from other property interests, like fee simple, being collective and cannot be sold.
• The rights associated with aboriginal title also include the rights to possess, enjoy, manage, and occupy and that all land use isn’t restricted to traditional practices.

Personal Property (Part 1 & 2)

• Personal Property categories; such as tangible and intangible property

Technology and the Law (Drones, Airspace, and the Right to Exclude).

• Restrictions for operating drones over private property are varied and are typically found in regulations, rather than laws.
• Disputes over ownership of airspace and possible trespassing by drones.

Right to Exclude

• Property owners exclude others from their property.
• Trespassing is a common law tort that protects this right
• Copyright also includes preventing others from copying or modifying works.

Case 17.1

• Illustrates the claim of aboriginal title.
• Shows the existence of the Tsilhqot'in Nation’s right to the land.

Case 17.2 (Chevron and Piercing the Corporate Veil)

• Discusses when the court may not lift the corporate veil, preventing a court from holding a corporation’s shareholders responsible for the company’s actions.
• Legal circumstances that would permit courts to remove the protection offered by corporate structures.

Bailment of Personal Property (Part 1, 2, & 3)

• Bailment: Temporary transfer of personal property possession. Bailment involves the transfer of possession (or temporary responsibility) of personal property from one person to another.
• Parties involved include the bailor (owner of the property) and the bailee (person who receives possession).
• The terms and conditions of the bailment, including the extent of the bailee’s responsibility must be outlined within documents of the agreement.
• Specialized regulations/rules pertain to specific types of bailments, including transportation, storage, repair, and lodging.
• Liability is typically based on common-law (or contract)
• Examples of a bailment
  • Leaving goods at a repair shop
  • Giving someone your car for repairs.
  • Using a luggage/delivery service.

Common Law Liability of Bailees

• The extent of care expected from a bailee varies based on factors such as payment, benefit, value of the bailed property, unique circumstances, and expertise.

The Contract of Bailment

• Bailment agreements can exist independently of a contractual agreement.
• If there’s a contract, the terms of the agreement are typically negotiated between the parties.
• The contract should define the service required, expected payment, and the liabilities of the bailee (responsible party) for damage or loss.

Intellectual Property

• IP encompasses the results of creative processes (ideas, expressions, designs, trademarks, etc.).
• Provides legal protection to incentivize creativity

Patents

• Patents provide exclusive rights to make, use, and sell an invention for a fixed term.
• This protects businesses engaged in industries that rely on technology or new product development .

Case 18.1

• Discusses the importance of patent infringement and the legal obligations around intellectual property.
• Shows the extent of patent rights concerning genetically modified plants and how rights can be extended beyond the specific cell or molecule.
• The court found that someone can be infringing on patents even if the intellectual property was delivered to them accidentally

Exclusions from Patent Protection

• Some items/practices are specifically excluded from patent protection.
• This can include elements that may be protected under copyright or other similar legal rights.
• It is also determined by policy choices (e.g., elements that would not be suitable for a patent; illicit objects, methods of surgical treatment)

Case 18.2

• Highlights the requirements for patenting business methods.
• Presents a court case where a business method was not considered patentable, emphasizing that the method must fall within legal categories of inventions.

Requirements for Patentability

• Patents are granted for new, useful, and non-obvious inventions.
• A one-year grace period exists, where prior disclosures or use of an invention may still permit a patent to be granted.
• The invention must have a practical application and be somewhat ingenious.

Patent Protection and Application

• The process involves applications to the Canadian Intellectual Property Office (CIPO).
• A patent agent can help prepare the application.
• Patents protect the owner's rights to manufacture, sell, and use the invention for a set period (20 years).
• Patents rights are specific to one country (e.g., a Canadian patent does not automatically extend to the U.S.)

Industrial Designs

• Protects the visual aspects of goods (shape, configuration, pattern, ornamentation)
• Registration process defines the rights to manufacture, sell or import a design that is considered similar and that may thus infringe.

Trademark Protection

• Trademarks are distinctive signs used for distinguishing goods/service
• Can be registered or unregistered
• Includes words, phrases, designs, symbols and other identifying characteristics
• Legal protection extends only to the areas into which the reputation of the owner has spread.
• This could include geographic locations, market segments, industries, etc.

Trade Names

• Trade names are the names under which a business operates.
• Adoption might prevent the use of similar trade names.

Trademarks and Domain Names

• Domain names are the unique addresses of websites.
• Cyber-squatting is a term that refers to the bad faith registration of trademarks or trade names that could be used as websites for purposes of selling the trademark to the rightful owner, or possibly preventing that owner from obtaining the domain name.
• Domain name providers usually have procedures for settling such issues.

Requirements for Registration of Trade Marks (1 & 2)

• To get a trademark, an applicant needs to demonstrate ownership, distinguish the goods/service, and demonstrate that the trademark is suitable for registration.
• The trademark must be distinguished or could become distinctive in relation to their goods or service.
• Exclusions from trademark registration that would make a trademark non-registrable.
• Non-registrable trademarks can include a name of a person, a description of the goods or service (or an implication of the goods or service), deceptively misdescriptive of the goods or service.

Case 18.3

• Highlights trademark infringement and passing-off issues, especially regarding similar business names, designs, and usage, and how those could lead to legal challenges.

Registration Process and Protection

• Processes for registering trademarks.
• Rights are granted for a specified period and can be renewed.

Copyright

• Copyright protects the expression of ideas and work, not ideas or facts.
• Protections are specific to Canada.
• This protection is ongoing for a set, agreed time period.

Requirements for Copyright Protection

• Copyright protection arises automatically with the creation of a work in a fixed form.
• Registration can strengthen the claim regarding ownership but is not compulsory.
• Essential aspects of a work that may receive copyright protection.
  • originality
  • fixation

Rights Under Copyright

• Various rights granted for a particular work which include those related to production, performance, reproduction, translation, adaptation and public presentation

Copyright Infringement

• Infringement occurs when someone copies or uses a work without permission, encompassing entire or significant portions of a work.

Case 18.4

• Illustrates the concept of copyright infringement and when an employer’s use of a similar work or concept amounts to a substantial use of a previously-created work.

Moral Rights

• Rights that protect an author's reputation and association with their work.
• Issues of paternity and integrity are protected by these rights.

Case 18.5

• Addresses the issue of moral rights infringement (how the work is changed)

Exemptions

• Several exceptions to copyright infringement exist, such as fair dealing.
• Fair dealings can include things like research, education, criticism, and more.

Case 18.6

• This case addresses fair dealing exemptions in the context of copyright; using portions of a work to provide commentary and criticism.

Confidential Business Information

• Information that provides a business advantage because it is secret and protected using criminal or civil laws.
• This protection can last forever if the confidential information remains undisclosed.
• Misappropriation includes deceitful, misleading, false ways of employing confidential information to make it available.

Process and Scope of Protection

• Protects confidential business information by preventing disclosure.
• Confidential information remains protected as long as it is secret.
• Criminal law penalties for deceitful or fraudulent access
• Breach of contractual obligations

Landmark Case 18.1

• This case describes the three-part test that a court must assess with regards to breach of confidence issues.

Limitations on Protection

• Protection ceases when the information is no longer secret, publicly available.

Acquisition and Protection of Intellectual Property

• Assignments and licensing are two means of transferring IP rights.
• Complying with statutory and common-law protections is essential to retain and maintain intellectual property rights

Business Application of the Law (Social Media and Copyright)

• Social media usage; risk of copyright infringement if employing others' images or content without permission or proper licensing
• Fair dealing exemptions in social media.
• Public domain concept- once an item falls into the public domain, it can be freely used or employed by anyone without infringement.

Litigation

• Litigation is often needed to resolve matters pertaining to intellectual property rights.
• It is common to engage in preventive litigation to avoid harm.
• Injunctive relief (Anton Pillar orders) can be used to halt or avoid harm to the business being violated.

Real Property

• Real property rights encompass various interests, including land, buildings, mineral rights, and leases.
• Common law, statutory, and constitutional concepts apply.
• Systems to register land rights and interests exist across Canadian jurisdictions (registry or land title system).

Types of Interests in Land

• Fee Simple:
• Other types such as mineral rights, lease estates, life estates and condominiums

Division of Ownership

• Land can be owned by multiple co-owners with equal rights to use/enjoy
• Tenancy in common & joint tenancy.

Registration of Interests in Land

• Each Canadian province has its own system for registering land rights and interests (registry, title system).
• The system that’s employed establishes priority based on who filed the document first.
• Registered interests take precedence.

The Registry System

• Describes the processes in a registry system where property is registered.
• The registry is a public record that can be consulted/used for searching a specific property.

The Land Titles System

• The process of identifying and registering ownership of property using the land titles system.
• Each property has a certificate of title that clearly outlines who owns the land and if there are any additional interests in the property.
• This system employs an insurance fund to settle any disputes or misunderstandings regarding the ownership of the property.

Purchasing Land

• Caveat emptor.
• Buyer must investigate property.
• Risks and obligations of purchasing land (e.g., taxes, municipal or provincial legislation)

Foreign Ownership

• Various regulations limit foreign ownership of land.
• Restrictions and considerations for those engaging in non-resident purchasing of land or real estate.

Obligations of Sellers

• The seller must not mislead the purchaser.
• Disclosure obligations for material defects or conditions that might affect the value.
• Use of property condition disclosure statements to outline risks or other potential claims about the property

Managing Risk (Part 1, 2, 3, 4, and 5)

• Factors to consider when purchasing property.
  • Doing background and due diligence research
  • Checking for appropriate zoning and regulatory compliance
  • Considering risks associated with the conditions of the property or land

Financing the Purchase of Real Estate (Part 1, 2, 3, and 4)

• Mortgagor and mortgagee (borrower, lender) roles
• Mortgage document/contract details.
• Registration and priorities for mortgages.
• Foreclosure and deficiency clauses within contracts.

Stages of a Sale of Land Transaction

• Defining the stages of the sale of land, and factors that might be included regarding property and land transaction, which may vary based on the specifics of the property or the transaction, such as purchase and sale agreements, investigations, and the closing.

Incomplete Transactions

• Reasons why a real estate transaction might not be completed, as well as the recourse when such occurrences happen

The Real Estate Lease (Part 1 & 2)

• Lease agreements create landlord-tenant relationships for property.
• Lease agreements are often unaffected by the transfer of property ownership.
• Elements of a lease agreement, such as length, and other responsibilities outlined in contracts.

Business Application of the Law (Retail Leases)

• Challenges and considerations for retail leases in a constantly changing business world

Terms of the Lease (Part 1&2)

• Essential terms of commercial leases (who the parties are, description of the property, permitted alterations, the terms of rent, security and damage deposits or other similar provisions, permitted uses and tenant hours, potential limits on the landlord’s ability to lease to competitors, methods of dispute resolution if a problem arises)

Obligations in Lease Relationship (Landlord, Tenant)

• Landlord obligations (protect tenant interest, respect lease conditions)
• Tenant obligations (pay rent, meet lease conditions, protect landlord and property)

Rights in a Lease Relationship

• Rights for tenants in a lease
  • Exclusive and quiet possession
  • potential right to assign the lease, or sub-lease if possible.
• Rights for landlords in a lease
  • Remedy of distress (right to seize property for non-payment)

Case 19.1

• Illustrates the concept of force majeure and how courts might interpret lease terms regarding a pandemic, and the types of remedies available to landlords when tenants/businesses breach their lease contracts.

Termination of the Lease

• Common conditions under which a lease might end.
• Methods of terminating a lease agreement

This quiz covers the essential aspects of corporate form, including its definition as a legal entity and the implications for shareholders. It also explores the processes of incorporation, stakeholder roles, and pre-incorporation considerations within corporate law. Test your understanding of these crucial organizational matters!