Business Law PDF

- Class B non-voting shares Franchise is a contractual arrangement between a manufacturer, wholesaler, or service organization (franchisor) and an independent business (franchisee), and must have: - 1. the granting of a right to conduct business under a trademark; - 2. the charging of...

- Class B non-voting shares Franchise is a contractual arrangement between a manufacturer, wholesaler, or service organization (franchisor) and an independent business (franchisee), and must have: - 1. the granting of a right to conduct business under a trademark; - 2. the charging of some initial and/or ongoing fee for that right; and - 3. the exercising of substantial control over the franchise operations. The Franchise Relationship: is governed by the general principles of contract, augmented by specific franchise legislation designed to provide protection for franchisees. Disclosure Requirements: Franchisors are required to deliver a disclosure document to prospective franchisees 14 days prior, covering (a) all material facts relating to the franchise; (b) financial statements; (c) proposed franchise and other agreements; and (d) other information as set out in the regulations. - Franchisees have the right to cancel the franchise agreement within 60 days - franchisee has a right of action for damages where it suffers a loss because of a misrepresentation contained in the disclosure document Fair Dealing: both the franchisor and the franchisee have at least the obligation to consider the interests of the other in making decisions and exercising discretion. They can sue for damages for the breach Right of Association: Franchisees have the right to associate with one another and form or join an organization of franchisees and franchisors may not interfere Joint Venture An association of business entities—corporations, individuals, or partnerships—that unite for the purpose of carrying on a business venture  - share profits and losses and management of the project - usually limited to a specific project or to a specific period of time but not necessarily so - Contractual agreement - May be partnerships or corporations - Can be held to owe fiduciary duties Other Relationships strategic alliance is a co-operative arrangement among businesses. - Contractual agreement A product or service distributorship is very much like a franchise. A contract is entered into whereby a manufacturer agrees to provide products and the distributor or dealer agrees to carry products or perform services prescribed by the manufacturer. sales agency relationship: usually an arrangement whereby a manufacturer or distributor contracts with an agent to sell goods or services supplied by the manufacturer or distributor on a principal/agent basis. - Agency agreement, with fiduciary obligations product licensing arrangement: the licensee is granted the right to manufacture and distribute products associated with the licensor’s trademarks or other proprietary rights, usually within a defined geographic area. - Contractual agreement The corporate form is prevalent and widespread. The characteristic that distinguishes it from the other basic forms for carrying on business is its separate legal status. This means that the owners are not liable with limited exceptions for the debts and obligations of the corporation. It also means that those who are dealing with a corporation need to understand that the owner’s risk is limited. Thus, if security is important, they should demand a personal guarantee. A corporation may be incorporated federally or provincially. There are few distinct advantages of incorporating in one jurisdiction versus another. Prior to commencing the incorporation process, incorporators must decide on a share structure, that is, the classes and numbers of shares authorized for issuance. The share structure may be simple or complex depending on the needs of the investors. The actual process of establishing a corporation is relatively simple, and essentially the same format is followed in all jurisdictions. It is a matter of completing and filing the correct forms with the appropriate government body. That said, the incorporation process is not without risks, such as the risk of choosing a name that is similar to that of another business. This risk can be substantially reduced by obtaining legal advice. A corporation can be financed by equity or debt. Equity represents what the shareholders have invested in the corporation in return for shares. Debt consists of loans that have been made to the corporation. The issuance of shares and debt instruments such as bonds to the public is strictly regulated by securities laws. Corporations can be held liable in two ways for torts: primary liability and vicarious liability. 1. Primary Liability: A corporation is directly responsible for a tort when the act is committed by its "directing mind and will" (i.e., top executives). This is known as the identification theory, which holds that the actions of the directing minds are considered as the corporation’s actions. a. Directing minds are typically high-ranking officers like CEOs or VPs. A corporation can have multiple directing minds, each responsible for different functions (e.g., one for marketing, another for finance). b. The challenge is identifying the directing mind, especially for mid- level employees.  2. Vicarious Liability: A corporation can also be held liable for torts committed by employees or agents who are not directing minds. Vicarious liability holds the corporation accountable for wrongful acts committed within the scope of employment, regardless of the level of the employee. Liability in Contract Corporate liability in contracts is generally governed by agency law rather than the identification theory. A corporation is bound by contracts made by agents acting within their authority (either actual or apparent). Apparent Authority: Historically, corporations could limit an agent’s authority via public filings (doctrine of constructive notice), but this is no longer the case. Now, third parties can rely on an agent’s apparent authority, making the corporation liable for contracts made by the agent, even if the agent exceeded their actual authority. Pre-Incorporation Contracts: If contracts are made before a corporation is formed, they are typically not binding on the corporation. However, once the corporation is created, it can adopt the contract and assume liability. To avoid personal liability, agents should ensure contracts clearly state they are acting on behalf of the corporation. Risk Management: It is advised to avoid pre-incorporation contracts unless absolutely necessary, as they can be legally tricky. Using a pre- formed (shelf) corporation can help ensure the corporation is in place to enter into contracts directly. The federal government amended the Criminal Code to expand corporate liability and increase penalties. Key Changes: 1. Broader Range of Individuals: Previously, only the actions of a corporation's directing mind could trigger criminal liability. Now, senior officers—individuals responsible for key organizational functions or policy decisions—can also trigger liability. This broadens corporate responsibility, focusing on the role of individuals, not just their titles. 2. Crimes Based on Knowledge, Intent, or Negligence: a. For intentional crimes, a corporation is criminally liable if a senior officer engages in unsafe conduct or directs others to do so, or if they know about unsafe conduct and fail to stop it, resulting in harm or death. b. For negligence-based crimes, a corporation can be held liable if its representatives cause harm due to unsafe conduct, and the senior officers responsible for the activity fail to meet the required standard of care, even if neither acted recklessly on their own. 3. Increased Penalties: The amendments introduce higher penalties, including fines for both summary conviction offences (up to $100,000) and indictable offences (no prescribed limit). Courts must consider factors like the economic advantage gained by the corporation, the public interest, and the likelihood of rehabilitation when determining fines. 4. Corporate Probation Orders: These allow courts to impose conditions for reform, such as restitution to victims, media publication of the offence, and mandatory policy changes within the corporation to prevent future offences. Corporations face regulatory liability under a variety of statutes that cover areas like taxation, human rights, pay equity, employment standards, consumer protection, anticompetitive practices, occupational health and safety, and environmental protection. Regulatory offences, while not always criminal in nature, involve punishable conduct that is harmful to public interests (e.g., pollution or misleading advertising). These offences can result in significant penalties for corporations, and sometimes for their directors and officers, including civil liability for damages. Examples of recent corporate regulatory violations and penalties include: 1. Keurig Canada Inc.: Fined $3 million for misleading claims about the recyclability of K-cup pods, required to donate $800,000 to an environmental charity, pay $85,000 for investigation costs, change product packaging, and issue corrective notices across various platforms. 2. ArcelorMittal Canada Inc. & 762374 Canada Inc.: Fined $15 million for violating the Fisheries Act and Mining Effluent Regulations, after depositing toxic substances into water bodies near fish habitats and failing to conduct required testing and reporting. 3. Bell Canada: Fined $7.5 million for anticompetitive practices under the Telecommunications Act, specifically for blocking its competitor, Videotron, from gaining access to its telephone poles, delaying its network expansion. 4. Tech Coal Limited: Fined $60 million after pleading guilty to violations of the Fisheries Act, for releasing harmful waste into the Fording River from coal mines in British Columbia. 5. Facebook Inc.: Fined $9 million for false and misleading claims related to its privacy settings under the Competition Act, after misleading users about their ability to control third-party access to their personal data. Given the variety and severity of potential penalties, corporations must carefully manage their exposure to regulatory offences, which can have significant financial, legal, and reputational consequences. Many jurisdictions allow self-dealing contracts (where a director or officer of a corporation enters into a contract with the company) under certain conditions, to avoid a blanket ban that could prevent beneficial deals. Under the Canada Business Corporations Act, a contract like Luke’s sale of furniture to his own company is enforceable if:  1. Disclosure: Luke must disclose the contract to the corporation in writing. 2. Non-participation: Luke must not vote on the approval of the contract. 3. Fairness: The contract must be fair and reasonable to the corporation. If these conditions are not met, the corporation can seek a court remedy, such as having the contract set aside or altered. A common conflict of interest arises when directors or officers are involved in corporate opportunities—business opportunities that the corporation could pursue but may choose not to. Directors have a fiduciary duty to act in the best interests of the corporation, not their own personal interests. Historically, directors were held to a very low standard of care. For example, the court ruled that a director was only expected to perform at the level of competence of a person with their own knowledge and experience, even if that meant being ill-informed or negligent. This led to situations where less-qualified directors were not held to high standards, which often resulted in poor corporate management. Recognizing that this low standard was insufficient, modern corporate legislation has raised the expectations. Now, directors and officers are required to meet an objective standard of competence, meaning they must act as a reasonably prudent person would in similar circumstances. While perfection is not required, directors must make decisions based on adequate information and exercise good judgment. Directors and officers of a corporation can be held liable for various actions, including torts, contracts, and statutory offences. Liability in Tort and Contract: Tort Liability: Directors are generally not personally liable for torts committed while acting on behalf of the corporation, as the corporation itself can be held accountable. However, directors may be personally  liable if their actions are extreme, intentional, or separate from the corporation’s interests. For example, in cases of extreme conduct (e.g., illegal detention of a customer), directors will face personal liability. Contract Liability: Directors typically aren't liable for contracts made on behalf of the corporation, but personal liability can arise if the director: o Contracts on their own behalf and the company’s. o Guarantees the company's performance under the contract. Liability by Statute: In addition to general management duties, directors are subject to a range of statutory obligations that impose significant penalties for non-compliance. These include fines and imprisonment. Some key examples: 1. Income Tax: Directors can be personally liable if the corporation fails to withhold or remit taxes, unless they can prove they acted with reasonable care. 2. Environmental Liability: Under laws like the Canadian Environmental Protection Act (CEPA), directors and officers can be personally liable for the corporation’s environmental offences if they fail to ensure compliance or take reasonable care in preventing harm. Avoiding Personal Liability for Directors Directors can minimize their personal liability risk by acting with care, diligence, and skill in fulfilling their duties. Key practices include: Regularly attending board meetings. Reading and understanding all relevant materials. Asking questions and engaging actively in discussions. Keeping personal notes and reviewing meeting minutes. Making informed decisions based on reliable information. Staying updated on the company's financial and operational affairs.  Seeking professional advice when necessary. Identifying potential problems early. Additionally, directors can protect themselves by: Ensuring an indemnification agreement with the company, which covers legal costs in the event of a lawsuit. Ensuring the company carries Directors' and Officers' Liability (D&O) insurance for coverage against claims, and reviewing the policy exclusions to ensure maximum protection. Shareholder Liability Although the corporation is typically a separate legal entity from its shareholders, piercing the corporate veil can hold shareholders personally responsible for corporate debts or liabilities. This generally happens in cases of fraud or when the corporation is used as a "facade" to conceal improper conduct. Shareholder Rights Shareholder rights generally fall into three categories: voting rights, information rights, and financial rights. Directors have the flexibility to allocate these rights across different classes of shares, which can vary in terms of voting and financial participation. For example, preferred shares may have limited or no voting rights, while common shares typically have voting rights and may carry financial benefits. 1. Right to Vote Voting shareholders (usually common shareholders) can vote for the board of directors and approve/disapprove of corporate decisions. The number of votes a shareholder has depends on the number of shares they hold.  Shareholders can also attend meetings, ask questions, introduce motions, and vote by proxy if they cannot attend in person. Non-voting shareholders (often preferred shareholders) may still have limited voting rights, such as on significant matters like asset sales. 2. Right to Information Shareholders have the right to access key corporate documents, including annual financial statements, meeting minutes, share transfer registers, and certain corporate records. Shareholders can also petition for an investigator if there's suspicion of mismanagement or financial impropriety by the corporation or its directors. 3. Financial Rights Dividends: Shareholders have the right to receive dividends, though the declaration of dividends is at the discretion of the board of directors. If the board abuses its discretion, shareholders can seek an oppression remedy. Asset Distribution: On dissolution, shareholders are entitled to a share of the corporation’s assets, with preferred shareholders typically being prioritized over common shareholders after creditors are paid. Pre-emptive Rights: Some shareholders have the right to buy newly issued shares before they are offered to outsiders, helping them maintain their proportional control in the company. Shareholder Remedies Shareholders dissatisfied with a corporation’s management or performance have several remedies available to them, including:  1. Selling the Shares: In widely held or public corporations, selling shares can be an easy remedy, but in closely held or private corporations, where share transfers are restricted, selling can be difficult. 2. Dissent and Appraisal Rights: If shareholders disagree with a fundamental corporate change (e.g., mergers, asset sales), they can exercise dissent and appraisal rights, requiring the corporation to buy their shares. This remedy is subject to strict procedures. 3. Derivative Action: If directors breach their duties or mismanage the corporation (e.g., taking corporate opportunities for personal gain, mispricing assets), minority shareholders can bring a statutory derivative action. This allows shareholders to seek court approval to sue on behalf of the corporation if directors are unwilling to act. The court can order remedies such as forcing directors to account for stolen profits, return ill-gotten gains, or even remove them from office. The oppression remedy is a widely used legal tool for shareholders in Canada, allowing them to seek relief if the corporation or its directors act in ways that unfairly disregard or prejudice the interests of shareholders. This remedy is available when the reasonable expectations of shareholders regarding management are not met, and oppressive conduct may include: Lack of a valid corporate purpose for a transaction. Directors acting in bad faith. Discrimination that benefits majority shareholders at the expense of minorities. Failure to disclose material information to minority shareholders. Conflicts of interest between directors' personal interests and the corporation’s. The oppression remedy is flexible, personal (can be brought by shareholders, directors, or others), and not bound by technicalities. However, it can be costly, time-consuming, and difficult to win, as courts are often reluctant to intervene in internal corporate disputes. To avoid such conflicts, shareholders may enter into agreements at the start of their business relationship, like a shareholders' agreement or unanimous shareholders' agreement (USA). A shareholders' agreement is common in small, closely held corporations and allows shareholders to define their relationship and governance structure differently from the default rules in the governing statute. It typically addresses issues such as corporate management, share transfers, and dispute resolution. A unanimous shareholders' agreement (USA) is a specific type of shareholders' agreement in which all shareholders agree to restrict, fully or partially, the directors' powers to manage the corporation. The main purpose of a USA is to keep control over certain matters with the shareholders, rather than the directors. When directors' powers are limited by a USA, they are relieved of their duties and liabilities to the extent of that limitation. As a result, if shareholders mismanage the corporation, they, rather than the directors, could be held liable for negligence or breach of fiduciary duty. Creditor protection ensures that a corporation’s assets remain available to satisfy its debts and prevents shareholders from improperly depleting the corporation’s resources to avoid creditor claims. legislation like the Canada Business Corporations Act includes provisions that prevent corporations from paying dividends if it would impair their ability to pay debts or make the company insolvent. If directors authorize such a dividend under these conditions, they are personally liable to restore the funds to the corporation. Corporations can be dissolved through a formal process outlined in companies legislation or a separate winding-up act. The process can be complex, so for small, closely held corporations, it is often easier to simply allow the company to lapse by failing to meet reporting requirements, which leads to the company being struck from the corporate register. Additionally, a court can order the dissolution of a corporation if shareholders have been wrongfully treated and dissolution is necessary to achieve justice. A corporation may also be dissolved if it goes bankrupt, as bankruptcy typically leads to the termination of the company.