Business Organizations Summary PDF

Introduction What is a Business? A business has an objective of gain as a result of their work Looking at who bears the risks and rewards Basic Forms of Business Organizations Sole Proprietorships 1. Commences when business commences 2. No distinction...

Introduction What is a Business? A business has an objective of gain as a result of their work Looking at who bears the risks and rewards Basic Forms of Business Organizations Sole Proprietorships 1. Commences when business commences 2. No distinction/separation between the business and the proprietor/owner 3. Proprietor obtains all rewards, suffers all risks – yet insurance/limitation in contracts 4. Subject to very few requirements a. Subject to Business Names Act, licensing requirements, potential tax advantages/planning i. Losses of SP (or partnership) can be offset against income 5. Look at Business Names Act, licensing requirements a. S. 2, need to register if name is different than your own b. S. 6 – liability for damages i. A person is entitled to recover compensation where the name that is registered is the same or deceptively similar to a name registered by the person ii. Subsection 2: the compensation you are entitled to is limited to the greater of 500 dollars of the actual amount of damage incurred c. S. 7 – carrying on business w/o registration i. If you don’t register, you can’t sue, except with leave of the Court under section 7(2) ii. The Court SHALL grant leave when the failure to register is inadvertent, no evidence the public has been deceived, and at the time of you making the application to leave, you were not in contravention of the Act iii. Note the word “shall” → doesn’t necessarily mean that if you don’t meet those three requirements you can’t be granted leave in other circumstances d. S. 10 – offences (mention of reasonable cause) Other Methods of 1. Co-ownership Carrying on Business 2. Joint ventures – relationship formed for specific purpose often for limited term a. Relationship often defined in contract 3. Strategic Alliances a. A business term 4. License a. Often granted by owners of IP to allow use b. Often component of overall business relationship such as franchise 5. Franchises – involves franchisor and franchisee a. Franchisee often weaker party but often protected by statute b. Elements require franchisor to deal fairly, make adequate disclosures, if disclosure lacking, allow franchisee to rescind agreement after receiving disclosures, and damages for misrepresentation 6. Distributorships a. Normally, distributor purchases goods to sell on behalf of manufacturer/wholesaler b. May also manage relationship with retailers/customers including warranty  service 7. Business Trusts a. Hybrid model incorporating features of corporation and trust b. Based on principle of separation of ownership and management c. Property of a business entrusted to a trustee that manages the business on behalf of the beneficiaries d. Prior to 2007, tax advantage as could flow through income to beneficiaries without trust paying tax 8. E-Commerce a. Goods and services offered through e commerce as opposed to bricks and mortar stores Partnerships What is a Partnership? Guidelines - Unlimited liability of partners - S. 5 of OPA → firm used to refer to partnership; actions may be taken in firm name - Income computed at partnership level but taxed in hands of partners How does a Partnership Carry on Business? Basics - Must be a business - Carrying on suggests continuous operation but partnership held to exist in single transaction - “View to profit” need not result in earning of profit but commercial motive is necessary Profit OPA S. 3 sets out guidelines Simple return by way of profit is insufficient Spire Freezers (2001) - Two partners (X and Y) holding condo building and low rental building - SF bought interest of one partner and half the interest of the other partner - The remaining half interest was sold to a number of investors - Y then buys condo, resulting in loss for the new partnership - Now there is a loss and this is deducted from income Issue: view to profit - View to profit or view to manufacturing loss - CRA argues that there is no partnership - SF argues they still have income producing asset with the low income building SCC determines property existed to make profit still Backman (2001) - Interest acquired in oil and gas property for $10k - It was loosely monitored by partners but not managed by them - De minimus interest in asset, no indication of ever acting on the property Grace v Smith - Agreement between bank and merchant - Bank is receiving portion of profits earned by merchant - Then the bank was sued as a partner - Bank had no intention to be partner - If profit, then partnership Cox v Hickman - Two partners (Smith and Smith) - Partnership ran into financial difficulty - Creditors appointed themselves as trustees to manage the business until the creditors  received back what they were owed - Then provided H with a bill of exchange - Bill was not honoured, business goes bankrupt - H sues trustees, C/Wheatcroft - Are the trustees partner? Yes, profiting from partnership until debts satisfied - HoL said that the creditors were merely mortgaging profits until debt paid - Business was improving chances of recovery - Determining Question: on whose behalf is the partnership being carried on 1865, Bovill’s Act - S. 3(c) and (d) are upheld in the OPA - “The advance of money by way of loan to a person engaged in a business with that lender entitled to receive a rate of interest that varies with profits or for a percentage of profit is not sufficient to indicate a partnership” Pooley v Driver - There is a partnership, P is creditor and D is one of the $500 lenders - $20k from B/H and needed $30k - So selling $500 loans in exchange for a percentage of profits - P came and sued D, one of the lenders of the $500 amount - Dealing with intention: not sufficiently “of itself” - Looking at other factors, like money made in profit Was Master correct? Read Continental Bank In Common - Depends on intent - Express, implied or by conduct - At the heart is mutual agency - Each partner is a principal and an agent for each other - Paired with the need to act in good faith Red Burrito v Husain - Restaurant dispute, H locks out RB - Although no agreement in place, the intention was to carry on as a partnership Kamex - K did not want to enter exclusive agreement, but one member signed on - The property was sold thru a different realty - Q: who was LePage able to go after? - SCC sided with TJ - Think: what was the intention of these persons? Westlock - Co-ownership or partnership? - Common bank account - Agreement to share business development costs - Combined efforts for business financing - Bonel did all rental arrangements, tenant inquiries and complaints - And deed in name of Bonel (of shopping centre and parking lot), and Westlock (of the grocery store) - Court: partnership despite property ownership/profits to be shared 80/20; lack of mutual control not determinative - You can have a partnership where one partner does nothing - ESTOPPEL? Continental Bank - CB to sell CB leasing to Central Leasing - Rolled in some kind of interest into the partnership - Time frame of existence barred the existence of partnership - No intention to form partnership with common view to profit (Crown argument)  - There are legitimate income earning leases, whether realized or not, is attributed to partners and duties i think are also distributed - Test: Was there agreement, was it acted upon, whether it governed affairs 23 The existence of a partnership is dependent on the facts and circumstances of each particular case. It is also determined by what the parties actually intended. As stated inLindley & Banks on Partnership (17th ed. 1995), at p. 73: “in determining the existence of a partnership... regard must be paid to the true contract and intention of the parties as appearing from the whole facts of the case”. 24 The Partnerships Act does not set out the criteria for determining when a partnership exists. But since most of the case law dealing with partnerships results from disputes where one of the parties claims that a partnership does not exist, a number of criteria that indicate the existence of a partnership have been judicially recognized. The indicia of a partnership include the contribution by the parties of money, property, effort, knowledge, skill or other assets to a common undertaking, a joint property interest in the subject-matter of the adventure, the sharing of profits and losses, a mutual right of control or management of the enterprise, the filing of income tax returns as a partnership and joint bank accounts. (See A. R. Manzer, A Practical Guide to Canadian Partnership Law (1994 (loose-leaf)), at pp. 2-4 et seq. and the cases cited therein.) 25 In cases such as this, where the parties have entered into a formal written agreement to govern their relationship and hold themselves out as partners, the courts should determine whether the agreement contains the type of provisions typically found in a partnership agreement, whether the agreement was acted upon and whether it actually governed the affairs of the parties (Mahon v. Minister of National Revenue, 91 D.T.C. 878 (T.C.C.)). On the face of the agreements entered into by the parties, I have found that the parties created a valid partnership within the meaning of s. 2 of the Partnerships Act. I have also found that the parties acted upon the agreements and that the agreements governed their affairs. - Need to think about agreement: co-owners or partners? - Looking at profit sharing, property involved, etc Key factors What was the true intention? - Sharing of profits - Sharing of losses/providing guarantee for firm’s debts - Control of partnership business - Statement of intention to form partnership (but note not determinative one way or the other –factor only) - Documentation indicating partnership - Signing authority - Holding one self out as a partner - Contributing capital – in money, services or property - Full time involvement in business - Use of firm name/address/employees Avoiding Being a Mere statement that not a partner not sufficient Partner Agreement that does not incorporate characteristics of a partnership Form a corporation (of which you are a s/h) to hold partnership interest Relationship Between Partners To each other - partners free to determine terms of relationship - Set out in a partnership agreement - In default, the Act s 20 – 31 governs the relationship - Based on equality, consensualism, and fiduciary relationship – all seen in s 24 and following - Developed in early common law - Both dated, and developed for a small firm Content of Duty Rochberg v Truster  - Accounting firm partner became director of client company - Acquired shares and made a profit - Disclosure of directorship but not of profit S 28: liable to the accounting firm for the profit - No necessity of loss by firm as precondition Mohammadamin v - Restrictive covenant extends beyond life of firm Zameni - S 24 – subject to an agreement to the contrary, partners share equally in profits and loss contributions; investment, certain powers of management - All partners considered active - Note – in W v MNR and Volske Consruction, recognition that can have a “sleeping” (inactive) partner - Today, partnerships differ dramatically – size; variable profit/investment criteria/variety of types of partners/complex administration structures requiring committees Default Rules Default rules in s 24 – note equality, consensualism and fiduciary relationship - But subject to agreement to the contrary - Equal contribution of capital and sharing of profits/losses - Indemnification of losses connected with firm’s activities - No interest on capital - 5% interest on capital contributed over agreed amount - All partners participate in management - Majority can make decisions in the ordinary course of business - Every partner to have access to accounts - S 24.7/s 24.8 – subject to agreement to the contrary, unanimous consent of partners to admission of new partner, and change in nature of business - S 25 – majority cannot expel partner - S 31- can assign share of profit but assignee not entitled to any of partner’s rights - S 26/32 – subject to agreement to the contrary, termination by partner of giving notice Note: this is consistent with definition of partnership as a relationship as when one partner leaves, relationship finished – that is why partnership agreement required to speak to continuation when partners leave - S 20 -- variation of default rules under agreement or Act varied only with unanimous consent - S 34 – partnership dissolved automatically if carry on illegal business - See Continental Bank in this regard - S 35 - can apply to the court to dissolve a partnership – note conditions Fiduciary Duty Fiduciary relationship – partners owe a fiduciary duty to one another - Flows from mutual agency (“in common”) – heart of partnership law - OPA – fiduciary duty not codified but is under BCPA s 22(1) - But implicit: “in common” - S 28: render true accounts; s 29: account for benefits received through firm (no moonlighting); s 30: account for profits from competing business - Are there limits on fiduciary relationship? - Prothroe v Adams (1997) Alta QB - Negotiating partners did not obtain price for goodwill in law firm merger - No evidence of value or ability to realize - Court: no beach of fiduciary duty to remaining partners But partnership agreement can allow for limitation of fiduciary duties - For example – law partner receiving income from teaching Disclosure and McKnight v Hutchison (2002) BCSC granting permission - Partner of law firm became director/s/h in client companies - Received income from business, but did not disclose to the law firm - Clause in partnership agreement permitting other activities but with notice  - Court: partner not protected given connection with firm’s law practice and failure to disclose Partnership Property S 21(1) – firm’s property is all property contributed to the firm, and acquired by the firm in the course of its activities - Contributing partner loses all personal rights over that property contributed S 22 – equally, property acquired with firm’s resources presumed to belong to the firm - Immaterial that property held in the name of particular partner - Firms may vary the statutory rules if clearly stated in the partnership agreement - Thus, all of the property belongs to all of the partners - No partner has an in specie interest in the property Liability to Third These rules are mandatory, not by default Parties - Rationale? → not part of partnership, not involved in partnership agreement - And apply to all partners S 6: every partner is an agent of the firm - Note two fold application: where authority; where no authority but in normal course - But note exceptions: where third party believes person not a partner; knows partner has no authority - What if partner acts totally outside usual scope of partnership business? S 7: actions of a partner/person with authority bind all other partners - S. 7: act done by a person with authority, then is binds the partnership (does not need to be a partner) - Ie: significant purchase S. 8: partner uses credit from the firm for private purposes, requires authorization from the other partners 9: effect of notice, if agreement restricts power to bind firm then anything contravening is nullified with knowledge of the agreement 10: liability of partners out of s. 6 agency relationship - Joint liability for debts and obligations of firm incurred while partner, a dead persons estate is also still liable S 11 –firm liable for torts and other wrongs committed by a partner - Korz v St Pierre OCA - Law partner liable even where no knowledge of other partners venture - Court: breach of fiduciary duty; breach of duty as solicitor - 11: liability of firm for civil wrongs (like negligence) - When does 11 not apply? → not acting in ordinary course or dont have authority to act - Falconi case S 12 – misapplication of property received from third party with apparent authority/or firm in the course of its business; firm liable for loss - 12: misappropriation or misapplication of monies by a partner, received by third party S 13 – partners liability joint and several – what is the difference? - 13: every partner jointly liable and severally when a partner becomes liable under 11 or 12 (only joint under 10) - Courts of Justice Act (139(1)) - However, 139(1) of Courts of Justice Act says joint liability, judgment against one does not preclude judgment against another in the same or separate proceedings - See also Ernst and Young v Falconi (1994) Ont SC - Partner provided help in fraudulent disposition of property of bankrupt person - Court: firm and partners liable - Met the test – was the fraudulent activity in the course of business of the partnership - See also GE Capital v Deloitte (2003) Ont SC - 3464920 Canada Inc v Strother (2007) SCC  - Strother acted for Monarch, retainer ceased given new tax shelter legislation, former Monarch employee joined Strother and started tax shelter company, whether breach of fiduciary duty to Monarch once acting and accepting personal interest in second client - Important case: broader approach to partnership liability - Firm held liable for breach not by itself but by individual partner of fiduciary duty owed to third parties; wrongful act or omission (In our s 11) includes equitable remedy S 18(2) – liability continues for prior acts after partner leaves firm S 10 – attaches to estate of deceased partner S 18(1) - But partner not liable for pre-existing obligations - Need to make inquiries and seek indemnification before joining partnership - 18(1): partner not liable for anything incurred before they became partner S 15 – can be liable as a partner by holding out - Representing oneself as a partner by word spoken or written or by conduct - Knowingly suffer to be represented by others as a partner - But note that need not know that third party relied on the representation - Focus of s 15 is on liability of person only - State of mind of person a crucial factor – knowingly - Ben-Mur Investments v Spring (1994) Ont SC - Defendant holding out as partner of lawyer committing fraud (mortgage money) - But plaintiff did not prove reliance on defendant’s misrepresentation - National Building Society v Lewis (1998) UK CA - Third party must have believed that person holding out was a partner Potential liability for debts after partner retires/death/insolvency - No liability post retirement/death/insolvency if – s 36 - Where third party not known to firm, notice in Ontario Gazette - Where third party known, actual notice required - Where third party never knew that retired partner was a partner - Where partner ceased to be a partner through insolvency or death - Potential liability for apparent member of old firm after retirement and reconstitution - No liability if notice of retirement given - Tower v Ingram (1949) UK KB – here retirement of partner not known as partner to third party - Firm used ex partner name (Ingram) after retirement against instruction - Notice given to banks, but not to anyone else or the Gazette - After dissolution, C ordered furniture from Tower on the letterhead including former letterhead - Tower was not paid, sued Ingram - Court: ex-partner not liable to third party - Mental element for holding out emphasized Strother v 3464920 Canada Inc, 2007 SCC 24 Facts: - Robert Strother was a partner at Davis & Co., a Vancouver law firm. - His speciality was film-based tax shelter investments. - He initially represented a company called Monarch Entertainment under an exclusive written retainer agreement, which prevented Davis from acting for competitors in film financing schemes. - However, the Minister of Finance announced amendments to Canadian tax law to do away with film-based tax shelters. - Strother told Monarch that the shelter vehicles were effectively dead, so Monarch wound down its business and the written Davis retainer expired - Darc, a former Monarch employee approached Strother with a new idea for a way around the government policy. - Strother agreed to help the employee start a business, getting a favourable tax ruling, and taking a major share in the new business (became partner with Darc in new business).  Despite the lapse in the written retainer, Monarch continued its relationship with Davis & Co. to explore other tax-driven investment schemes. - But Strother did not tell Monarch of the way around the closing of tax shelters or the favourable tax ruling. - Once Monarch did learn the facts, it sued Strother and Davis & Co Issues: Issue: Did Strother and Davis violate their duty to Monarch? - Although Monarch’s particular tax-shelter retainer had come to an end, Monarch still retained services from Davis (on a more limited retainer). - Was it part of Strother’s duty to provide candid advice on all matter relevant to the continuing retainer? Ratio/Rule: The Supreme Court, by a 5-4 majority, upheld the British Columbia Court of Appeal’s finding that Strother had acted in breach of his fiduciary duty to Monarch, when he set up a rival business, but failed to advise Monarch how it could take advantage of a tax ruling. - Strother’s personal interest affected his ability to provide zealous representation to Monarch. - Instead of requiring Strother to pay to Monarch all of his profits from his competing film business, he was required to account for his personal profit gained directly from his film business and from his earnings as a law firm partner derived from billings to Monarch, but only for a fifteen month period, while he was acting both as a partner in the law firm and as a business competitor of Monarch. - Once he resigned from the partnership, he had no duties to his former client, Monarch. Reasoning: The Strother case arises from unusual facts, but its implications are important for all lawyers. 1) The courts take conflicts seriously, and will impose sanctions for breach. This case has been lengthy, public and expensive. 2) While the scope of a lawyer’s retainer is governed by contract, the lawyer-client relationship is overlaid with certain fiduciary responsibilities which are imposed by law. Those duties may go beyond what the parties have contracted for. - Source of the duty is not just contractual (i.e. the retainer), it arises from circumstances creating a relationship of trust and confidence from which flow obligations of loyalty and transparency 3) Lawyers are at risk if they engage in outside businesses in direct competition with clients. Their duty to zealously represent their client’s interests may be compromised by their personal stake. Law firms should closely scrutinize the activities of their partners in external businesses. They may face liabilities if there is a problem. 4) Lawyers must be candid in their advice to clients, but must not reveal confidential information of other clients. 5) Lawyers can act for commercial competitors as long as they can properly and fully represent the legal interests of both clients. Dissolution of the Partnership Partnerships inherently fragile - Not separate entities but a group of persons So statutes permit simple dissolution - S 32 and s 33 provide default rules, subject to agreement to the contrary - S 32 – if fixed term; single venture; otherwise if not fixed term on notice by any partner (partnership at will) - S 33 – on death or insolvency of any partner - S 34 – mandatory dissolution if business becomes illegal - See Continental Bank SCC - But these default rules unworkable in large firms - As not permit for continuity of firm - So partnership agreements provide provisions for continuity  - Death or bankruptcy or withdrawal of partner not result in cessation of firm - S 35 – court has power to order dissolution - Incapacity of partner - Prejudicial conduct - Breach of partnership agreement by partner or continuing differences - Business becomes unworkable - When just and equitable - Landford Greens 746470 Ontario Inc (1993) Ont SC - Even if partnership has acted with a loss for a period of time not being available for dissolution, can still be dissolved - Real estate development project - Market downturn, project stalled - one partner sought dissolution and sale of assets, other partner resisted - Court: change in business circumstances not sufficient grounds for dissolution - S 44 – dissolution procedure - Firms assets used as follows: - Pay off creditors, then loans and advances from partners, then repayment of capital to partners, then distribution of balance to partners in profit sharing ratio - Note: partnership agreement may provide for a different procedure (but not to prejudice of third parties) Partnership Agreements Partnership Agreements - Often useful to modify default rules - Depends on size of operation, complexity of business, and organizational structure So useful to prepare partnership agreement - Record creation of firm and terms of relationship - Reiterate mandatory rules - May want to include statutory provisions for completeness and emphasis Elements - Name – ownership issues as potential trademark/IP issues - Also liability issues if continue to use name of retired/deceased partner - Also registration issues – must check BNA to ensure name not already in use or is registered Description of business - Useful to describe as determines partner’s functions - Describes limits of authority of individual partners - Sets limits on restrictive covenants when partner leaves and wishes to compete - Test: protect legitimate commercial interests of the firm Membership - Determine percentage agreement needed for new partner (o/w default rule of unanimity) - As well, can cover capital contribution, and profit share/loss contribution - Same with expulsion of partner - S 25 - Partnership agreement must authorize and indicate percentage Capitalization - Amount contributed by partners - Default rule contribute equally (s 24.1) - Useful to specify initial contribution, rules on further contributions, amounts payable on death/retirement, and interest on loans/advances (as o/w 5%) Profit share and distribution - Determine profit share based on capital contribution, work performed - Agreements usually set out measures, time and manner of distribution - Often compensation committee Management - Delegation in large partnerships to committees - Partners meetings - Authority to sign contracts etc - Budgets and financial powers at different levels Provisions in agreements promote better governance, reduce internal disputers and minimize third party claims - Look to break up of Heenan Blaikie Dissolution - Critical, o/w partnership ends given default rule s 32(c) – dissolution by any partner giving notice - Promotes continuity of firm - In this regard, must also agree on exit terms for partner that retires/withdraws - Keith v Mathews Dinsdale (1999) Ont SC - Six months notice by partners for retirement found reasonable S. 24 The interests of partners in the partnership property and their rights and duties in relation to the partnership shall be determined, subject to any agreement express or implied between the partners, by the following rules: 1. All the partners are entitled to share equally in the capital and profits of the business, and must contribute equally towards the losses, whether of capital or otherwise, sustained by the firm, but a partner shall not be liable to contribute toward losses arising from a liability for which the partner is not liable under subsection 10 (2). 2. The firm must indemnify every partner in respect of payments made and personal liabilities incurred by him or her, (a) in the ordinary and proper conduct of the business of the firm; or (b) in or about anything necessarily done for the preservation of the business or property of the firm. 2.1 A partner is not required to indemnify the firm or other partners in respect of debts or obligations of the partnership for which a partner is not liable under subsection 10 (2). 3. A partner making, for the purpose of the partnership, any actual payment or advance beyond the amount of capital that he or she has agreed to subscribe is entitled to interest at the rate of 5 per cent per annum from the date of the payment or advance. 4. A partner is not entitled, before the ascertainment of profits, to interest on the capital subscribed by the partner. 5. Every partner may take part in the management of the partnership business. 6. No partner is entitled to remuneration for acting in the partnership business. 7. No person may be introduced as a partner without the consent of all existing partners. 8. Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners, but no change may be made in the nature of the partnership business without the consent of all existing partners. 9. The partnership books are to be kept at the place of business of the partnership, or the principal place, if there is more than one, and every partner may, when he or she thinks fit, have access to and inspect and copy any of them S. 25 No majority of the partners can expel any partner unless a power to do so has been conferred by express agreement between the partners S. 31 Rights of assignee of share in partnership (1) An assignment by a partner of the partner’s share in the partnership, either absolute or by way of mortgage or redeemable charge, does not, as against the other partners, entitle the assignee, during the continuance of the partnership, to interfere in the management or administration of the partnership business or affairs, or to require any accounts of the partnership transactions, or to inspect the partnership books, but entitles the assignee only to receive the share of profits to which the assigning partner would otherwise be entitled, and the assignee must accept the account of profits agreed to by the partners. On dissolution (2) In the case of a dissolution of the partnership, whether as respects all the partners or as respects the assigning partner, the assignee is entitled to receive the share of the partnership assets to which the assigning partner is entitled as between the assigning partner and the other partners, and, for the purpose of ascertaining that share, to an account as from the date of the dissolution. S. 26 Retirement from partnership at will  26 (1) Where no fixed term is agreed upon for the duration of the partnership, any partner may determine the partnership at any time on giving notice of his or her intention to do so to all the other partners. Notice of retirement (2) Where the partnership was originally constituted by deed, a notice in writing, signed by the partner giving it, is sufficient for that purpose - Note: this is consistent with definition of partnership as a relationship as when one partner leaves, relationship finished – that is why partnership agreement required to speak to continuation when partners leave S. 32 Dissolution by expiry of term or notice 32 Subject to any agreement between the partners, a partnership is dissolved, (a) if entered into for a fixed term, by the expiration of that term; (b) if entered into for a single adventure or undertaking, by the termination of that adventure or undertaking; or (c) if entered into for an undefined time, by a partner giving notice to the other or others of his or her intention to dissolve the partnership, in which case the partnership is dissolved as from the date mentioned in the notice as the date of dissolution, or, if no date is so mentioned, as from the date of the communication of the notice S. 20 Variation by consent of terms of partnership 20 The mutual rights and duties of partners, whether ascertained by agreement or defined by this Act, may be varied by the consent of all the partners, and such consent may be either expressed or inferred from a course of dealing S. 34 By illegality of business 34 A partnership is in every case dissolved by the happening of any event that makes it unlawful for the business of the firm to be carried on or for the members of the firm to carry it on in partnership S. 35 By the court 35 (1) On application by a partner, the court may order a dissolution of the partnership, (a) when a partner is found to be incapable as defined in the Substitute Decisions Act, 1992; (b) when a partner, other than the partner suing, becomes in any other way permanently incapable of performing the partner’s part of the partnership contract; (c) when a partner, other than the partner suing, has been guilty of such conduct as, in the opinion of the court, regard being had to the nature of the business, is calculated to prejudicially affect the carrying on of the business; (d) when a partner, other than the partner suing, wilfully or persistently commits a breach of the partnership agreement, or otherwise so conducts himself or herself in matters relating to the partnership business that it is not reasonably practicable for the other partner or partners to carry on the business in partnership with the partner; (e) when the business of the partnership can only be carried on at a loss; or (f) when in any case circumstances have arisen that in the opinion of the court render it just and equitable that the partnership be dissolved. Other Relationships Joint Ventures Not a distinct form of business organization - Rather a business term indicating agreement/contract to share resources  - It is a pooling of resources for an objective, but not a combining of resources so that all of the resources belong to all of the partners - Limited time or undertaking - Each venture has a degree of control over the venture - Example – joint venture for exploration activity - Can carry on joint venture through partnership or corporation – legal character clear - But if just through joint venture agreement - What is liability to third parties? CMHC v Graham - CMHC in joint venture with developer to construct homes/CMHC provided designs (1973) NS - CMHC financed construction, took back mortgage, and when customer bought mortgage transferred to purchaser - Purchaser (Graham) stopped mortgage payments alleging defects in construction and CMHC liable as joint venture partner - Court – found joint venture (not partnership) but imposed liability on CMHC – found mutual agency - Contribution of resources by both, mutual control and management, and expectation of profit and profit sharing Wonsch v Danzig - Joint venture in real estate development (1990) OCA - Venture a disaster, and one of the venturers sought to benefit at expense of the other - Court: found fiduciary relationship – could not benefit at the expense of the other venture But courts reluctant to find fiduciary relationship in joint ventures – particularly where parties sophisticated - See Blue Line Hockey v Orca Bay Hockey (2009) BCCA Limited Partnerships Formed by declaration under Limited Partnership Act of Ontario - LP must have at least one general partner - But can be corporation (without assets) - General partner has unlimited liability - Often promoter is general partner - Limited partners are passive investors S 9 limited partners liability limited to amount of investment - Tax advantage as income/losses flow directly through to limited partners S 8 – rules governing general partners - In essence, cannot act contrary to partnership agreement, admit new general partner, or admit more limited partners unless consistent with partnership agreement S 10 – limited partners may inspect books/records, demand information and accounts, and seek dissolution - But restrained from active role S 12 – can inquire into status of business and advise from time to time; yet s 13 cannot control - If more than that, lose limited liability status - Haughton Graphic v Zivot (1986) Ont SC - Limited partner was also controlling s/h and president of general partner - Court: exercised control of business and lost limited liability - Compare Nordile Holdings v Breckenridge(1992) BCCA - Limited partner director and officer of general partner but not controlling s/h - Court: limited liability applies - Stillwater Forest v Clearwater Forest (2000) Sask QB – refinancing not control of business - Negotiating refinancing without authority to conclude refinancing not control; control is a question of fact S 18 - Limited partners interest transferable - So can trade limited partnership units in stock market S 15(1) – limited partner’s right to recover investment - On dissolution; at time specified in partnership agreement; on unanimous agreement, and on 6 months notice if no time otherwise specified S 15(2) – but right of recovery subject to firm’s ability to pay debts/partnership agreement amendment - Dissolution of limited partnership – rules similar to regular partnership Taxation - Share of profit/loss taxable in partners hands (both general and limited partners) - Losses in early years of operation can be set off against other income Limited Liability Partnerships For professionals where governing statutes permit - As incorporation of many professional firms not permitted - Mechanism for protection from liability in large partnerships - Protection from negligence of a partner never known - S 44.1 – s 44.4 in OPA: introduced in 1998 - S 44.2 – LLP permitted if following conditions: - Partnership agreement specifies LLP character ie, the profession to be carried on Professional practice governed by statute - Insurance is mandatory for the profession Firm registers under BNA and uses LLP suffix - S 10(2) liability of partners - LLP partners not liable for debts or obligations in respect of wrongful acts or omissions of another partner or employee or any other debt or obligation of the partnership while an LLP - S 10(3) but is liable for - Personal negligent or wrongful act or omission - Similar act or omission of person under direct supervision - Acts or omissions of any partner or employee if fraudulent; supervision irrelevant - Acts or omissions where partner knew or ought to have known and made no efforts to prevent - S 10.3 – partner’s interest in partnership property still subject to creditor’s claims The Corporation Introduction General - Separate legal entity - Distinction between owners and directors/managers - Income/debts are those of the corporation and not the owners - Shareholders benefit and suffer because of the income/debts - Discounted value of future value back to present day which will determine the cost of security History Two types of corporations before 19th Century - Created by royal charter - Created by special acts of Parliament The incorporation by registration (based on UK Joint Stock Companies Act, 1844) - Register a memorandum of association: where applicants set out the fundamental terms of agreement - Incorporation automatic in registration method; on registration, certificate of incorporation issued In 1860s, also introduce letters patent method - Incorporation depends on exercise of Crown discretion, although more form than substance - The general statute regulates the conditions under which the LP are issued 1970s - OBCA  - Based on US model – automatic incorporation upon filing of Articles of Incorporation 1975 - CBCA - Again based on US model – incorporation as with OBCA - S 4 “ to advance the cause of uniformity of business corporation law in Canada” - Hybrid: combines features of both registration and LP systems - Like LP model, statutory allocation of powers between s/h and directors (s 102), but like registration model, subject to change in AOI or USA (where can delegate powers to s/hs); like LP model, s/h remedies in statute - CBCA model adopted in all jurisdictions but PEI (LP); BC (hybrid); and Quebec (akin to CBCA) Constitutional Matters Federal and Corporations formed both under federal and provincial powers Provincial - S 92(11) - Provincial: corporations with “provincial objects” – powers exercisable within province, and outside if registered or licensed to operate in that other jurisdiction (Bonanza Creek, PC) - Thus province can grant “capacity” to operate extra provincially but not right - Right must come from other province in which operates - But now ability to operate provincially almost automatic - Very high degree of corporate mobility Corporation needs to register to operate in Ontario if from out of country, need license and to pay fee (Ontario ExtraProvincial Corporations Act) Federal No explicit power Incorporation But Citizen’s Insurance v Parsons (1881) PC – “peace order and good government” Significant for corporations operating in more than one province CBCA s 15(2) – corporations can carry on business throughout Canada Jurisdiction to Provincial Regulation of federal incorporation Regulate - Cannot affect character/powers/intra-corp relations of the corporation, including corporate name - But can regulate through legislation within provincial competence/where not subject to paramountcy doctrine - Eg, securities law relating to share sale, contract law, labour law - Canadian Indemnity Co v BC(AG) (1977) BC enacted “Autoplan” legislation that brought into existence provincial insurance plan; SCC – not contrary to trade and commerce power and not affect status of federal corp; prohibition on private insurance companies equally applicable to federally incorporated insurance companies Federal regulation of provincially incorporated companies - Valid if justifiable by federal powers under Constitution Act - Industry specific: telecommunications, inter-provincial transportation Federal and provincial governments can also regulate operations of foreign corporations in relevant province/Canada Charter of Rights and Freedoms S. 15(1) corporation has “rights, powers and privileges of a natural person” - What does this mean/implications? - Sue and be sued - Enter contracts, hold property, etc - Charter recognizes several rights and freedoms – but extent still not concluded S. 23 “citizen” and 15 Little Sisters Emporium v Canada (1996) SCC: s 163 CCC, s 58 CA – officer determined that “individual” imported material obscene; LSE argued infringed s 15/s 2 of the Charter - LSE importing purportedly obscene material and LSE under duty to prove not obscene Where corporations - Court (6/3): S 58 of CA in violation of s 2 freedom of expression, but s 1 saved provision cannot be protected - But reverse onus provision (putting on importer the onus of disproving obscenity) struck down “everyone” - S 2 – freedom of thought, expression, religion, association - S 7 – right to life liberty and security of the person - S 8 – right against arbitrary search and seizure - S 9 – right against arbitrary detention/imprisonment - S 10 – rights following arrest: reason, right to counsel, and habeas corpus - S 12 – right against cruel and unusual punishment “A person” S 11 – protections regarding criminal charges and trial - Position varies depending on components - R v CIP Inc (1992) SCC – yes, re trial within a reasonable time - But would delay prejudice the rights of a corporation re the criminal acts? S 11 (c) – right against self incrimination re corp - Pre Charter – R v Paterson (1980) SCC – not available; manager can be compelled to testify at trial - Post Charter – R v Amway (1989) SCC – similar reasoning continued; no bar to requiring corporate officers to be examined/testify at trial of corporation; not violation of s 11(c) as corporation (artificial entity) could not be a witness S 11(d) – probably also entitled to presumption of innocence, and fair and public hearing by impartial tribunal S 11(f) – right to trial by jury – not sure Religion: R v Church of Scientology (1997) leave refused – private action for libel against the church not invoke the Charter; no freedom of religion for corporations - But what about R v Big Mart Drug Co? Corporation charged for Sunday opening under Lord’s Day Act - Charter applied – rationale: no one should be subject to charge under unconstitutional law Freedom of RJR MacDonald v Canada(AG) (1995) SCC – recognized as violated in context of commercial Expression advertising - But Crown able to rely on s 1 – breach more justified where social considerations of little relevance Vann Media v Oakville (2008) OCA - Set back restrictions on outdoor billboard advertising - Crown defended restrictions under s 1 – reasonable limits prescribed by law … reasonably demonstrated in a free and democratic society - Court: set back rules justified; restricting display boards to industrial areas not justified Is s 1 balancing exercise different where corporations (as opposed to individuals) Involved? Toronto Star Newspapers Ltd v Canada (2009) OCA - Star challenged ban on publishing bail proceedings of persons charged with terrorism offences - Court: ban violates freedom of press and freedom of expression - Expands corporation’s ability to rely on freedom of expression beyond purely commercial context - More flexible approach of the court? S. 6 Freedom of Association/freedom of movement (s 6) - Canadian Egg Marketing Agency v Richardson (1998) SCC – s 2b/6 applied to indivs only - Statute regulated egg marketing: no allocation of egg marketing production to the Yukon - CEMA sued applicant for illegally exporting eggs – defence was to challenge to territorial restriction on marketing of eggs, based on denial of right of association/mobility with others re the marketing of eggs  - Court: expanded Big M to civil proceedings brought by state against defendant – no one should be subject to sanctions under unconstitutional law - Scheme to ensure orderly marketing of eggs based on historical quota and here exclusion of NWT based on this scheme – right not designed to protect activity itself S.7 right to life, liberty and security of the person - Irwin Toy v Quebec(AG) (1989) SCC: Consumer Protection Act – Challenge to restrictions on ads targeting children under 13 - Court: right not available to corporations as cannot be imprisoned or lose their life - Violated freedom of expression, but saved under s. 1 - Position reiterated in R v Wholesale Travel (1991) SCC: misleading advertising under Competition Act - R v Agat Labs (1998) Alta - Corporation charged under Environmental Protection law, and denied document relied upon by prosecution - Court: corporation entitled to document S. 8 unreasonable search and seizure - Southam v Canada (1982) SCC - Corporation entitled to protection against unreasonable search and seizure - R v Tele-Mobile (2006) Ont SC - Production order issued to corporation under CCC set aside due to cost it imposed on the corporation S. 9 protection against arbitrary detention/imprisonment – not relevant S. 10 right to reason, counsel … on arrest - No jurisprudence to date - Probably because issues of arrest, detention and imprisonment irrelevant for corporations Conclusion Courts generally sensitive to commercial (as opposed to personal) character of corporations S 1 analysis Also: Court can consider whether restrictions affecting corporations will also extend to its constituents - Little Sisters – impact on readers - Church of Scientology – impact on individuals acting for the Church Corporations can also assert a public interest standing in cases – Hogg, Constitutional Law (2007) - Key question: does the corporation have a genuine interest in resolving the question, and are there other more reasonable means to bring the question before the courts? Incorporation Process What is a business Corporations organized under the Business Corporation Acts (CBCA; provincial statutes) corporation? What is not included? - Not for profit corporations; specialized corporations such as banks, insurance corporations, trust and loan companies, and cooperative credit associations - Each have their own statute of incorporation eg, Bank Act Incorporation The incorporation process Process - Corporation can be formed by one or more individuals or corporations - Need to choose whether to incorporate federally or provincially - Prescribed material needs to be filed with regulatory agency (Corporations Canada for CBCA) - Documents include - Articles of incorporation s 6 form 1 - Notice of Initial registered office address and directors s 19(2); s 106(1) form 2  - Name search report - Filing fee - Articles of incorporation - Name; classes and numbers of shares; number of directors; restrictions (if any) on transfer of shares; restrictions (if any) on business to be carried on - Once filed, and fee paid, certificate of incorporation granted – s 8 - S 9 – corporate existence begins on date of certificate (even if no business carried on) - Articles are attached to the certificate - Amendment of articles by special resolution of s/hs (2/3 vote of s/hs) First directors hold office until meeting of s/hs and election of (potentially) new directors - What do initial directors do? By resolution, pass general bylaw (formal organizational arrangements); appoint officers; banking arrangements; resolve to issue shares - Note: - Bylaws: not mandatory, but (often in general bylaw) rule adopted by BOD that deal with internal “affairs of the corp”/management structure, such as notices for meetings, officers, and signing powers - Directors adopt, but subject to s/h confirmation at next s/h meeting: s 103; Then s/hs meet: - s/hs resolutions such as amending articles of incorporation; approve the bylaws; elect directors; determine s/h agreements - s 146 - unanimous s/hs agreement, if any - s/hs can usurp all or part of directors’ powers to themselves or retain power to control directors - Documents (AOI; bylaws; s/hs resolutions; s/h agreements) filed at head office, and with Corporations Canada; available for public inspection Function of Corporate Law Corporation has relationships with numerous stakeholders - And function of corporate law is to determine the rights/obligations/relationships of many of these stakeholders Function also is to encourage investment in corporations; promote corporate form of enterprise; and set out rules by which corporation is governed; rules to protect s/hs; and rules to protect non-s/h groups Other laws affect business corporations such as labour, consumer protection, debtor-creditor etc Corporate law reduces agency costs (costs of setting up/operating a corp) through ”enabling” rules: - CBCA -- standard rules relating to director (s 117-119) and s/h (s 94-114) meetings - Rules enable AOI and bylaws to be simpler - Limited liability rule reduces risk and cost of capital Limited liability, s 45 - Also known as s/h immunity - s/h risk limited to amount of capital contributed; compare partnership and sole proprietorship - But note that can render ineffective through personal guarantees etc - Non statutory options such as risk insurance and negotiated contracts more expensive - Limited liability rule shifts risk to non s/hs (say if bankrupt) Corporations under control of directors/managers - But corporate residue belongs to s/hs - So potential conflict when managers act in self interest - US: managers/officers are treated as agents of s/hs, but generally not in Canada Corporate law protects s/hs - s/hs have power to elect/remove directors – s 106, 109 - Directors/officers have fiduciary duty to act in best interests of corporation – s 122 - Financial reporting to s/hs – s 155 - Remedies for s/hs – Part XX Particular rules to protect minority s/hs - Why do minority s/hs require special protection? How is this accomplished? - Higher threshold (2/3) of s/h approval for “fundamental changes” - Exit rights for minority s/hs in certain situations – s 190  - S 241 – oppression remedy broad: for oppression, unfair prejudice, unfair disregard of interests Protection for non-s/hs (mainly financial and trade creditors – lenders; unpaid sellers) - S 45 – personal immunity rule for s/hs, but subject to statutory exceptions, - Fiduciary duties of officers/directors, and personal liability for breach - Solvency rule regarding distribution of corporate assets - No surplus spending that would result in insolvency - Remedies (certain of which are available to a creditor) Limits on limited liability - Why necessary? To achieve the appropriate balance where improper act/omission - Liability usually for directors/officers and s/hs when acting outside of capacity - Principles governing personal liability unclear: see Clarkson v Zhelka(1967) Ont SC - S 45 – statutory exclusions – improper reduction of stated capital; improper payments by directors; USA; improper/excessive payment on dissolution - Reasonable to believe corp will be unable to pay debts or come into a negative realizable funds - 118(4)/(5): inappropriate payment to shareholders - Breach of statute stating there should be no payment - 243: shareholders liable for 2 yrs after dissolution of the debts of corporation to the extent that they are responsible to the company (amount of shares) - Common law exclusions – stripping away the corporate veil - Bad faith, misrep, etc Other liabilities imposed: - S 119 - Directors liable for unpaid wages Directors liable under other statutes - S 227.1 ITA not paying withholdings to government - Occupational Health and Safety Act - failure to comply with safety standards Other rules protecting non-s/hs (third parties) - S 10 – publicizing corporate character in name, for example, ltd/corp/inc - S 10(5) – full name of corporation to be shown on contracts, invoices, negotiable instruments and orders for goods/services - S 34—36 – solvency/impairment of capital rule to protect corporate assets from s/hs - Applies broadly to purchase/redemption/retraction of shares; also s 42 payment of dividends - S 118 – directors personal liability for issuance of shares for inadequate consideration; can attempt to recover against s/h - S 25 – minimum investment – shares cannot be issued for a receivable; cannot be subject to further assessment - They can be used as like money or paying for services - Just no “IOU” Also, transparency - must file records with Corporations Canada - AOI; registered office; directors - S 263 – must file annual return with updated information - Must file annual returns under provincial legislation - Additional filing requirements for “distributing” corporations under Securities law Special Corporations without Limited Liability Origin from UK law where s/hs not entitled to limited liability protection - s/hs can be made fully liable for corporate debts – on dissolution, or on an ongoing basis - Exist in NS, BC, Alberta - Why exist? Tax reasons primarily Professional Corporations Conditional incorporation for professionals - Accountants, lawyers and other specified professionals - Incorporation subject to the following:  - All shares owned by professional members, directors/officers also the professionals, corp name includes “professional corporation”, and A of I restrict any other business from being carried on - Limited liability except for negligence – compare LLP? - Professional corp: lower tax rate for corps Nature of the Corporation Separate Existence and Limited Liability - S 15(1) - Incorporation creates a separate person with rights, powers and privileges of a natural person - But legal tension and balance to be struck - Between promoting corporations as efficient investment vehicle with limitation of liability; and ensuring that those rules do not result in different groups being disadvantaged unfairly - s 45 - Also known as shareholder immunity - shareholder risk limited to amount of capital contributed; compare partnership and sole proprietorship - But note that can render ineffective through personal guarantees etc - Non statutory options such as risk insurance and negotiated contracts more expensive - Limited liability rule shifts risk to non shareholders (say if bankrupt) Salomon v Salomon - S transferred proprietary business to S corp for 39 L and Co (1887) HL UK - Of 20,007 shares issued, S held 20,001; remaining 6 held by wife and kids - As part of consideration, S Co issued 10 L secured debenture to S - Business failed, liquidator appointed - Whether S entitled to prior payment as sole secured creditor of company - Liquidator argued no: S Co a sham; and S Co an agent of S - S succeeded (no finding of fraud) - Why? Corporate statute set out conditions; registration documents filed and constructive notice to creditors; leg’n may not have intended to apply to one person corporation but conditions met - So separate legal relationship recognized despite S relationship with the company - Controlling shareholder; director; creditor; relationships with other shareholders - And property of a corporation – separate legal person - owned by the corporation - shareholders have no legal right of ownership/use/possession over that property - shareholders merely residual claimants to corporate property after discharge of liabilities Lee v Lees Air - Lee held virtually all of the shares in LAF; also director and chief pilot Farming Ltd (1960) - Died in work air crash, and widow brought action under WCA JCPC - Rejected defence as one person company and could not be an employee of oneself - Court: Company could enter into employment contract with shareholder/director/chief pilot Disregard of Corporate Legal Personality - Courts generally respect separate entity rule - But exceptions where court will “lift the corporate veil”: - Agency; Objectionable purpose; Interests of the revenue; Fragrantly opposed to justice - Actions usually brought by someone asserting claims against (and through) the corporation - Agency - Clarkson v Zhelka (1967) Ont SC – web of companies and creditors arguing that Zhelka held land as agent for Selkirk - Wildman v Wildman (2006) OCA - Rockwell Development v Newtonbrook Plaza OCA Clarkson v Zhelka web of companies and creditors arguing that Zhelka held land as agent for Selkirk (1967) Ont SC - No agency; creditors not prejudiced; separate companies recognized as distinct - Longest bankruptcy in Ontario, congrats Selkirk - Corporations were operated by S, who was either sole or principle shareholder - C was trustee and on behalf of the creditors brought an action against Z or Industrial held land and thus excess monies from foreclosure as an agent of S From CanLII: - George Selkirk promoted and incorporated several companies, one of which was known as “Industrial Sites and Locations” Ltd. (ISL).ISL purchased land, which was paid for by two of Mr. Selkirk’s other companies (Langstaff Land Developments and St. George Developments).A year after purchasing the land, ISL conveyed the land to Mr. Selkirk’s sister, Ms. Zhelka, in return for a $120,000 promissory note.Mr. Selkirk petitioned for bankruptcy and Clarkson (as trustee in bankruptcy) sought a declaration that the land (which had been transferred to Ms. Zhelka) was actually the property of Mr. Selkirk and that ownership of the land should be vested in Clarkson for the benefit of Mr. Selkirk’s creditors - The Court concluded that the sale of the land to Ms. Zhelka was a sham and that a “resulting trust” had been created in favour of ISL, the true owner of the land. - If a company is formed for the express purpose of doing a wrongful or unlawful act, the individuals responsible, as well as the company, are responsible to those to whom liability is legally owed. Whether an individual has constituted the company his agent is a question of fact in each case. - “In questions of property and capacity, of acts done and rights acquired or liabilities assumed, the company is always an entity distinct from its corporators. It is not an alias or a sham and the principle of the Salomon case stands unimpaired…” “If a company is formed for the express purpose of doing a wrongful or unlawful act, or, if when formed, those in control expressly direct a wrongful thing to be done, the individuals as well as the company are responsible to those to whom liability is legally owed…” “In such cases, or where the company is the mere agent of a controlling corporator, it may be said that the company is a sham, cloak or alter ego, but otherwise it should not be so termed…” “Whether an individual has constituted the company his agent is a question of fact in each case. A controlling or total share interest does not in itself establish such agency. Due regard must be had to law of principal and agent relating to the formation of the relationship…” “Although the instant case may be close to the line, the plaintiff has failed to satisfy me that I should declare Industrial to be his alter ego or his mere agent for the conduct of his personal business or for the purposes of the conveyance in question to the defendant Zhelka. In the result, the action must be dismissed.” Wildman v Wildman - W sole s//h of corp; used position to maintain funds in corp and prevent payment of (2006) OCA spousal/child support - Court: liability of W extended to corp under his control - W carried on successful landscaping business - Had many orders for child support - Used position of sole shareholder and left all funds in the corporation so he did not have to pay Rockwell - Court: shareholder distinct from corp and property of corp Development v - R sued over zoning changes Newtonbrook Plaza - R failed and costs awarded OCA - N brought action against R for the amount of costs - No authorization of R, working as an agent of Kelner - R had no assets at time of judgment - N is on solid ground, TJ held in favour of N and awarded the costs from Kelner - K was actual contracting company, R was nominee corp - Reversed by ONCA, R is not an agent  - R is distinct from property of K, following Soloman Incorporation Considerations and Process - Corp may be formed by one or more indivs/corps - No requirements for corp promoters, provided indivs 18 or +, not incapable,fand not status of bankrupt - Documents need to be filed with Corp Canada - A of I; initial registered office; first directors (s 19, s 106); filing fee - A of I – s 6(CBCA) - Must contain name of corp; province where registered; classes and number of shares; restrictions (if any) on issue, transfer and ownership of shares; number of directors or mivn-max; and restrictions (if any) on business activities Registered Office - Address registered with Corp Canada - Records kept at registered office - Need not necessarily be head office - A of I (form 1) must state province/territory of registered office - If change, require amendment to A of I (special resolution) - Notice of Registered Office (form 2) must state street address - If change address, notice (form 3) must be filed with Corp Canada Class(es) and - Set out in A of I number of shares - Description – “rights, privileges restrictions and conditions” - of each class set out - Three basic rights: right to vote; receive dividends if declared; participate in corporate surplus on dissolution - Types of shares: common shares (three rights) and preferred shares (certain rights with preference as to one) - May but not need to specify number of shares in A of I - S 25 – default power to issue shares with the directors consent - But can restrict powers of directors to issue shares by USA, AOI, such as including maximum number of shares in A of I; o/w director’s powers unrestricted - Promotes flexibility; but implications on corp governance? - S 24(1) - Shares cannot have par value Number of Directors - Must have at least one, but distributing corp at least 3 of which 2 must not be employees of corp or one affiliated - Corp can choose between specific number of directors, or max/min number - BOD size depends on individual organization Restrictions on issue, - General principle is that shares are freely transferable transfer, or - But can include restrictions in A of I ownership of shares - S 28 – if in AOI, pre-emptive rights for new issue to existing shareholders - Right of first refusal (for closely held corps), or (s 174) restrictions on share transfer to maintain Canadian ownership or to ensure meet legal requirements eg, publisher (s 174); note – s 32(1) allows corp to hold shares in itself for certain of these reasons - S 49(8) - Restrictions on transfer must be stated on certificate, o/w not binding except where relates to Canadian ownership rules (note limitations on restrictions for publicly held companies – s 174) Restrictions on - Corp can do any business, except where restrictions Business - Overcame earlier requirement that had to specify “objects” with intra/ultra vires problems - S 16(3) – third parties not bound by A of I restrictions, as corp bound by contracts  - Breach of restrictions under A of I does have consequences - Court can restrain activity - Application can be filed by shareholders, creditors, or complainants as set out in s 238 - Also, breach of A of I recognized as a ground for oppression under s 241 - Other provisions can be set out in the A of I - S 6(3) - Super majorities for certain shareholder/director decisions, but s 6(4) not permitted for director removal - S 34/35/36 – limit corp right to buy back its own shares – but in any event note the solvency and capital impairment conditions (also limitation on dividend payments s 42) - S 114 – set out any matter permitted by Act or bylaws such as notice, location and quorum for directors’ meetings - S 6(2) – any other matter that can be included in the bylaws, for example, s 132 – place of shareholder meetings; s 139 – quorum for shareholder meetings - But the more included in A of I, the less flexibility, and increase difficulty in making amendments as special resolution of shareholders required (compare ordinary resolution with bylaws) Other Documents to - S 19/106 (form 2) - Initial registered office and first directors be Filed on - S 105(3) – at least 25% of directors must be Canadian resident, unless 3 or less directors Incorporation - S 19(4)/113 – must notify Corp Canada w/in 15 days if change - OBCA – note: no residency requirement; also registered office and directors need be included in A of I, and notice of change filed under s 4 Corporate Information Act Payment of Fee Completion of Incorporation - S 8 - Certificate of incorporation issued upon submission of relevant documents - S 9 – at that time, corp comes into existence - First directors hold office until first shareholders meeting, when elected or replaced - Lawyers assist in forming corp, but also is Corp Canada guidance Post Incorporation - Business does not need to be commenced to be incorporated Organization - First meeting of directors to be held after incorporation - At meeting, may resolve to adopt bylaws (may be a general bylaw) – deal with internal operations/workings of the company - procedures for director/shareholder meetings (notice, quorum); remuneration and indemnification; specification of director duties; financial matters such as year end of corp; procedure for payment of dividends - Can also pass resolutions re: issuance of shares, banking arrangements, appointing officers, signing authority - S 103 - then shareholders must adopt the bylaw(s) at next shareholder meeting - Corporations can be widely held (public/distributing) or closely held (private) - Public – many shareholders, mostly passive, trade on stock exchange and vehicle for raising capital - Private – can be one person, or small (family/professionals) group, formed mainly for limited liability and possible tax advantage - Governance considerations of two groups vary widely - But limited distinction in corporate law between the two scales of corp - Widely held per s 2(1) CBCA and regs is distributing corp - Distributing corp is one that has filed a prospectus, has listed securities on an exchange, and is a reporting issuer - Such a corp must have 3 plus directors, an audit of its FSs, an audit committee (s 171), and file FSs with Corp Canada (s 155/160) - A further category is a corp that is not a distributing corp but has 50 plus shareholders  - Such a corp (as a distributing corp) requires proxy solicitation (s 149), and when management or shareholders solicit support for voting positions must provide information to all shareholders - Closely held corps – consideration of a USA - Allows shareholders to usurp power of directors, and not practicable for widely held corps - And closely held corps not need elaborate bylaws - Might have transition from closely held to public corp - Need an IPO of shares - And changes to corp documents will be required - For example: delete restrictions on share transfer, terminate shareholder agreements, and prepare more extensive bylaws to elaborate on procedure re director/shareholder meetings Jurisdiction of - Need two decisions: incorporate w/in or outside Canada?; and if within, whether federally Incorporation or provincially? - Factors to consider: where business will be carried on, residence of directors, status and recognition, disclosure obligations, provincial tax liability, provisions of corporate law - Place of business critical as will determine federal or provincial incorporation - Disclosure obligations: s 263 (form 22) - corps must file annual returns; and Ontario corps must file initial and annual returns that must include directors and addresses (Corp Information Act s 2(1)/3.1) - Extra-provincial and foreign corps doing business in Ontario must also file returns - Failure to file/incorrect information can result in a penalty (s 250/251; OCA s 13/14) and cannot sue without leave of the court Place of Business - Federal corp not need license to operate in any province - Ontario Extra-Provincial Corp Act s 4 – corp from other provinces (but not foreign corps) exempted from need for a license, but need to register - Some other provinces similar and others (BC)) require a license - And trigger for license is doing business in the province - OEPCA s 1(2) – having a place of business, doing business, or holding an interest in real property (but not include merely taking orders or advertising) - But in Alta soliciting business or telephone listing is enough - Failure to obtain license is an offence under the OEPCA - Liability extends to corp, directors and officers - Need license to launch action, own land, and license may be cancelled for sufficient cause - Federal incorporation may be preferable for doing business - Can operate across Canada w/o need for license - Liability for provincial tax - Place of incorporation not relevant - Just whether income earned in the province - Not a major consideration - Provisions of corporate law - Most provincial models based on CBCA (BC, hybrid; PEI, LP jurisdiction) - Most often not a significant consideration - Recognition: for overseas business, CBCA has more recognition - Continuance - Corps incorporated in one province can migrate to another; common reason amalgamation - Need permission of exporting jurisdiction Corporate Names - Name: two objectives – avoid confusion in the market place; protect value (goodwill) - S 12(1)) – ban on names that are “prescribed, prohibited or deceptively miss-descriptive”/where name has been reserved; if so, refuse to register  - To avoid market confusion, and avoid public policy concerns - “prohibited”: Cannot suggest (without consent) association with gov’t, universities or professional associations, reg 25/26 – obscene, reg 27 - Further prohibited if name is not distinctive (reg 30) - Must not be merely descriptive of activity or goods/services eg Apples Inc, Fruit Sellers ltd - Must not be name of living person or one who died w/in last 30 years - Need consent and person to have material interest in the company - Must not be just name of geographic area - Should have descriptive and distinctive e