Insurance PDF

Insurance cornerstone of an e+ective risk management program. Allows businesses to transfer risk. Insurance policy: a contract of insurance Insurer: company that sells insurance coverage Insured: one who buys insurance coverage Premium: the price paid for insurance coverage Insura...

Insurance cornerstone of an e+ective risk management program. Allows businesses to transfer risk. Insurance policy: a contract of insurance Insurer: company that sells insurance coverage Insured: one who buys insurance coverage Premium: the price paid for insurance coverage Insurance has limits, It can't protect against every risk, and it can be expensive Costly Not always available Severe weather events like wildfires and flooding are resulting in higher premiums and changes in the extent of coverage. Insurance policies are regulated by legislation in each of the provinces Insurance legislation does the following: o Sets rules for contracts: It tells insurance companies what must be in their contracts. o Regulates the industry: It controls insurance companies, brokers, and adjusters by setting rules for them. o Monitors companies: It watches insurance companies to make sure they're doing well financially. Basic Types of Insurance Life and Disability Insurance: Provides payments on death or disability of the insured. Property Insurance ( aka: Fire Insurance) Provides payment when property of the insured is damaged or destroyed by accident. Liability Insurance (aka: Casualty insurance) Provides payment when the insured is legally responsible for loss or damage a third party. The Insurance Contract To be valid, the contract of insurance requires that the insured have an insurable interest in the thing insured. Insurable interest: financial stake in what is being insured o Insures have a right on subrogation after they have indemnified the insured Subrogation: right of an insurer to sue the wrongdoer who caused the loss. Other than life insurance, insurance contracts are contracts of indemnity:  o The insured is supposed to be "made whole" but not profit. Salvage: insurer's right to title of what remains of property after paying for the total loss An insured cannot claim against an insurance policy if they willfully caused the loss. For example: if an insured deliberately sets fire to their business, they cannot collect on their fire crime. The Policy Insurance contracts are complex and technical o Content is partly as a result of legislation Most policies include: o Subject matter, duration of coverage, premium, limits of coverage and period of coverage o Obligations the customer must satisfy to preserve coverage o Exclusions that could result in no coverage Policies generally contain a number of exclusion clauses o For example: the standard property policy excludes coverage when the insured building has been left unoccupied for more than 30 consecutive days. Rider: clause altering or adding to coverage in a standard insurance policy Endorsement: written evidence of a change to an existing insurance policy. Insurance Products Three Categories: Life, Property, Liability Commercial auto insurance: o Law requires vehicle owners to have insurance for liability arising from its ownership, use and operation. o Third- party liability insurance is mandatory with statutory minimum requirements o Collision coverage- insures the insured's own vehicle loss. (Optional) o Disability/ Death: insurance for injuries or death of the insured or other occupants Employees injured in auto accidents may be subject to Workers' Compensation Legislation. (WCB) Clinical trial insurance covers legal liability arising out of clinical trials and usually covers all reasonable legal costs associated with claims. All-risks property insurance: insurance coverage that protects property against all types of physical loss or injury arising form an external clause unless specifically excluded. Business interruption loss insurance: o Usually an add-on to the commercial property insurance o Provides financial compensation should the business have to temporarily shut down because of an insured peril. Environment impairment insurance:  o Pollution is usually excluded from CGL policies o Environmental impairment insurance is usually very expensive Commercial general liability policy o Purpose: to insure enterprises for liability resulting from damage caused to third parties during the course of business operations. o There may be exclusions which limit the extent of coverage Commercial crime insurance: o Provides compensation for the dishonest acts of employees Directors & OIicers liability insurance: o Insures for personal liability for matters as failing to remit taxes or pay wages, using confidential information, and environmental contamination Remedies of the Insured Against the broker: o Broker: middle person between the insurance companies and the insured Assists in purchasing insurance by reviewing business operations, assessing the risks it faces, and recommending coverages. They can be sued for negligence for poor advice with respect to coverage Against the insurance company: o Insurers owes a duty of good faith to the insured o Insurance adjuster: one who investigates and evaluates insurance claims. Will advise the insurer to settle the claim. If the insured and insurance company disagree about the nature or amount of coverage, the insured may have to sue for breach of contract Tort Harm caused by one person to another, other than through a breach of contract, and for which the law provide a remedy. The objective of this law is to provide compensation to persons who are injured as a result of the actions of others Determines when responsibility for a loss should be "shifted" to the person considered responsible for causing the loss The tort law have distinct categories For example: Trespass to land: Wrongful interference with someone's possession of land. Deceit or fraud: a false representation intentionally or recklessly made by one person to another that causes damage. Negligence: unreasonable conduct, including a careless act or omission, that causes harm to another. How Torts are Categorized Two Main Groups: Tort committed intentionally Torts committed deliberately or on purpose Intentional Tort: Harmful act that is committed deliberately or on purpose. Examples: False imprisonment: Unlawful detention or physical restraint or coercion by psychological means. Battery: Intentional infliction of harmful or o+ensive physical contact. When someone is negligent, they are liable for damages even though they did not intentionally cause the event in question. Tort Law and Criminal Law The same event can give rise to two distinct legal consequences: one in tort law and one in criminal law. For example, an impaired driver who injures a pedestrian in a crosswalk may have committed a criminal o+ence and may be liable for the tort of negligence. The purpose of criminal law and tort law di+er: o The purpose of a criminal prosecution is to censure behaviour, and the prosecution of the crime is carried out by the government, usually without compensation to the victim. o The purpose of tort law is to require the wrongdoer to compensate the victim. Commencing the Actions Criminal Law Prosecution brought most often by Crown prosecutors employed by the federal or provincial governments. o The wrongdoing the "accused" and the victim is the "complainant." In tort law, the injured party sues in a civil action to enforce their personal or private right to secure compensation o The injured person is the "plainti+" and the wrongdoer is the "defendant" Proving the Actions In a criminal action: o The Crown has the burden of proving the crime "beyond a reasonable doubt." Guilt must be a logical deduction from the evidence, and it is not su+icient that the jury or judge believed the accused "probably" committed the act. Conviction may result in imprisonment In a civil action: o The Plainti+ has the burden of proof and must prove that it is more likely than not that the defendant committed the tort  o Success results in the defendant paying damages to the plainti+. Liability in Tort: Primary and Vicarious Liability Primary liability arises due to one's own personal wrongdoing. Vicarious liability: the ability than an employer has for the tortious acts of an employee committed in the ordinary course or scope of employment. o Employers are traditionally vicariously liable for: 1. Employee acts authorized by the employer; or 2. Unauthorized acts so connected with authorized acts that they may be regarded as albeit improper modes of doing an authorized act. It can be di+icult to distinguish between an improper mode of performing an authorized act that attracts liability and an entirely independent "act" that does not. Employer can be liable for the employee's intentionally wrongful acts if a significant connection to authorized conduct is established. Employers are not liable for crimes committed by employees. Liability and Joint Tort- Feasors Tort-feasor: a person who commits a tort Joint tort-feasors: two or more persons whom a court has held to be jointly responsible for the plainti+'s loss or injuries. Legislation provides: If negligence of more than one person is responsible for the loss, the plainti+ can sue any or all of them, and fault will be apportioned between the joint tort-feasors according to their level of responsibility. The plainti+ can recover 100% of the judgement form any of those defendants whom a court has held to be jointly responsible for the loss or injuries. Liability and Contributory Negligence Contributory negligence: defence claiming that the plainti+ is at least partially responsible for the harm that has occurred. If the defendant proves that the plainti+ was responsible for at least a part of the loss, the amount of damages that the plainti+ is awarded is reduced by the proportion for which the plainti+ is responsible. Damages in Tort Tort's goal is to provide remedy by giving compensation to victims, usually with money. Plainti+ is entitled to be out into the position the were in before the tort was committed. There are less common alternatives are equitable remedies, such as an injunction- a court order requiring or prohibiting certain conduct. Workers' Compensation Legislation- legislation that provides no-fault compensation for injured employees in lieu of their right to sue in tort. Pecuniary and Non- Pecuniary Damages Non- pecuniary damages/ (aka: General damages): compensation for pain and su+ering, loss of enjoyment of life, and loss of life expectancy. Pecuniary damages: compensation for out-of-pocket expenses, loss of future income, and cost of future care. An injured person is entitled to an award su+icient to provide them with all the care and assistance their injury will necessitate. A court may award past loss of income up to the date of trial and will also value the diminished earning capacity, usually with input of experts such as vocational experts and labour economists. Special damages refer to out of pocket expenses resulting from the injury causing event such as ambulance costs and medication costs. Some of these damages may be repaid to the provincial health insurer under the principle of subrogation. Punitive or Exemplary Damages Punitive damages (aka: exemplary damages): fine that are intended punish the defendant for outrageous, antisocial, or illegal behaviour. Example: the intentional act of defacing someone's property may attract punitive damages. Aggravated Damages Aggravated damages: Compensation for intangible injuries such as distress and humiliation caused by the defendant's reprehensible conduct. They seek to compensate the plainti+ for the emotional consequences of the defendant's poor behaviour. What is Negligence? Careless act that causes harm to another. In law, this refers to a failure to show the care that a reasonable person would have shown in a similar situation. Reasonable care: the care that a reasonable person would exhibit in a similar situation. The law of negligence attempts to provide compensation to victims without discouraging legitimate activity or imposing unreasonable standards. Establishing a Negligence Action The Elements of a Negligence Action 1. Does the Defendant Owe the Plainti+ a Duty of Care?  Duty of care: the responsibility owed to avoid carelessness that causes harm to others. This step have 2 stages: Stage 1: is there a prima facie( at first sight or on first appearances) duty of care? The plainti+ must prove reasonable foreseeability and proximity. Reasonable foreseeability arises if the harm to the plainti+ was a "reasonably foreseeable consequence of the defendant's negligence. "Reasonable foreseeability considers whether the defendant should objectively have anticipated that their act or omission would cause harm to the plainti+. Proximity arises when the parties are in such a close and direct relationship that it would be "just and fair having regard to that relationship to impose a duty of care in law." Stage 2: Are there residual policy considerations outside the relationship of the parties that may negate ( make ine+ective) imposing a duty of care? 2. Did the Defendant Breach the Standard of Care? The defendant's conduct is judged according to the standards of behaviour that would be observed by the reasonable person in society. Reasonable person: the standard used to judge whether a person's conduct In a particular situation is negligent. Is not perfect; a person of ordinary intelligence who uses ordinary prudence. Professionals must meet a higher or specialized standard of care. When the activity poses a high risk, the law imposes a higher standard of care. 3. Did the Plainti+ Sustain Damage? Damage is a requirement of the tort of negligence. 4. Was that Damage Caused by the Defendant's Breach? The plainti+ must show causation: Causation: the relationship that exists between the defendant's conduct and the plainti+'s loss or injury. Usually determined by asking the following question: Would the harm not have occurred but for the defendant's actions? 5. Was the Damage Too Remote? At this point, a court asks: If there is an obligation to take reasonable care and it was breached, how far will the legal liability of the defendant stretch? Remoteness of damage: whether the actual harm su+ered was reasonably foreseeable or not. Thin skull rule: the principle that a defendant is liable for the full extent of a plainti+'s injury even where a prior vulnerability makes the harm more serious than it otherwise might be. This rule protects the plainti+ who has an inherent weakness or "thin skull" that makes a given injury more serious than one might otherwise reasonable anticipate. The law requires the plainti+ to prove each and every element in a negligence action. It is not enough to establish some of the elements or even most of them. Defences Contributory negligence- this defence recognizes that, in many instances, both the defendant and the plainti+ may have been negligent. If proven, the court will reduce the plainti+'s reward by their proportion of fault. Voluntary assumption of risk: the defence that no liability exists as the plainti+ agreed to accept the risk inherent in the activity. This is a complete defence, and the plainti+ will be awarded nothing even though the defendant had been negligent. The defendant must show that the plainti+ - knowing of the virtually certain risk of harm- released their right to sue for injuries due to the negligence of the defendant. Negligent Misstatement (or Negligent Misrepresentation) Pure economic loss: financial loss that results from a negligent act where there as been no accompanying property or personal injury damage to the person claiming the loss. Negligent misstatement or negligent misrepresentation: an incorrect statement carelessly made. Professional: someone engaged in an occupation, usually governed by a professional body, requiring the exercise of special knowledge, education, and skill. Professionals like accountants or lawyers are most likely to commit tort of negligence due to giving bad advice. Also be in breach of contract with the client. Negligence and Product Liability Product Liability: liability relating to the design, manufacture, or sale of the product. Same elements of proving negligence apply to negligence claims against a manufacturer. Negligence and the service of alcohol Commercial establishments serving alcohol owe a duty of care to impaired patrons to assist them or prevent them from being injured and to members of the public who are injured by the conduct of their drunken customers. The economic relationship between the commercial host and patron provides an important rationale for extending the law of negligence in this way. The Negligence Standard versus Strict Liability Strict Liability: the principle that liability will be imposed irrespective of proof of negligence. The scope of strict liability is limited. Strict liability is largely confined to vicarious liability as well as liability for fires, dangerous animals, and the escape of dangerous substances. Liability in contract is also strict liability Torts and Property Use Occupier: Someone who has some degree of control over land or buildings on that land. An occupier may be an owner or even a tenant. Tort actions may arise in relation to property in a number of ways, most commonly when the occupier of the property harms others This area of the law varies by jurisdiction Common law determines liability by classifying the visitor as a trespasser, licensee, invitee, or contractual entrant Each class owed di+erent standard of care. o Highest - contractual entrant o Lowest- trespasser Contractual entrant: person who has paid (contracted) for the right to enter the premises o The duty owed to this class ( in the absence of a contract specifying the duty) is a warranty that the premises are as safe as reasonable care and skill on the part of anyone can make them. Invitee: any person who comes onto the property to provide the occupier with a benefit. o The occupier must warn the invitee of any unusual danger o There is no requirement to warn of a usual or common danger that ordinary reasonable persons can be expected to know and appreciate. Licensee: someone who has been permitted by the occupier to enter for the benefit of the licensee. Occupiers are responsible to licensees for any unusual danger of which they are aware or that they have reason to know about. Trespasser: any person who is not invited onto the property and whose presence is either unknown to the occupier or is objected to by the occupier. o The occupier is liable for any act done with the deliberate intention of doing harm to the trespasser, or an act done with reckless disregard for the presence of the trespasser. Liability Under Occupiers' Liability Legislation Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, and Prince Edward Island have enacted occupiers’ liability legislation. The legislation di+ers somewhat between jurisdictions, but there are some common general principles. o A high duty of care, equivalent to the negligence standard, is owed to entrants who are on the property with express or implied permission. o Occupiers may not deliberately harm or endanger trespassers. o Alberta has special provision for child trespassers. The Tort of Nuisance Nuisance: any activity on an occupier's property that unreasonably and substantially interferes with the neighbour's rights to enjoyment of the neighbour's own property. o Does the activity significantly and unfairly disrupt the use and enjoyment of the land? The court have developed the following guidelines: Significant and Unreasonable: The interference must be both. Temporary Interference: Short- term disruptions usually aren't considered nuisance. Limited Protection: Not all interests are protected, like the right to sunlight. Balancing Interests: Courts weigh the benefits of an activity against the harm it causes. Trespass Trespass to land: wrongful interference with someone's possession of land. Arises in several ways: o A person comes onto the property without the occupier's express or permission. o A person comes onto the property with the occupier's express or implied consent but is subsequently asked to leave. Any person who refuses to leave becomes a trespasser. o A person leaves an object on the property without the occupier's express or implied permission. Trespass is actionable without proof of harm or damage, and injunctions are usually the remedy sought. Legislations in some provinces impose fines for trespass. Torts from Business Operations Assault: Threat of imminent physical harm by disturbing someone's sense of security. Battery: Unwanted physical contact; intentional. Example: Security guards physically forcing a suspected shoplifter. False imprisonment: Unlawful detention or physical restraint or coercion by psychological means. Example: A store owner wrongfully accuses a customer of shoplifting and detains them without legal justification. Legal Authority: the authority by law to detain under section 494 of the Criminal Code. o The arrest can happen at the time of the o+ence or “within a reasonable time after the o+ence is committed and they believe on reasonable grounds that it is not feasible in the circumstances for a peace o+icer to make the arrest.” o If store personnel detain a suspected shoplifter, they must immediately call the police. Deceit/ Fraud: false representation intentionally or recklessly made by one person to another that causes damage. Passing oI: presenting another's goods or services as one's own. o Can be intentional or accidental o Damages and/or an injunction may be sought. The Trademarks Act contains aa statutory form of action that bears a strong resemblance to the tort of passing o+. Interference with contractual relations: inducing someone to break a contractual obligation owed to another. Example: poaching an employee and enticing them to breach their contract with their existing employer. Defamation: public utterance of a false statement of fact or opinion that harms another reputation. The key ingredient to this tort: The defendant’s words would “tend to lower the plainti+’s reputation in the eyes of a reasonable person.” The statement did in fact refer to the plainti+. The words were communicated to at least one other person beyond the plainti+. Defences to Defamation: Fair comment: defense to defamation that is established when the plainti+ cannot show malice and the defendant can show that the comment concerned a matter of public interest, was factually based, and expressed a view that could honestly be held by anyone. Absolute privilege: a defence to defamation in relation to parliamentary or judicial proceedings. Injurious or malicious falsehood: statement about another's goods or services that is false and harmful to the reputation of those goods or services. False statement: the statement about the product or service must be untrue. Malicious intent: The person who made the false statement must have known it was false or didn't care if it was true or not. Proprietorship Unincorporated business organization that has only one owner Oldest, simplest form of business organization Most often used No legislation pertaining to the sole proprietorship, but you need business license and register a trade name. Easy to set up Owner has unrestricted responsibility for obligations No legal distinction between business and its owner. Financial Liability in a Sole Proprietorship Have significant financial liability because any obligation of the business is the owner's personal liability. Borrowing o Since its not a legal entity, it must borrow in the name of the owner who is personally liable for the debt. Contract Liability o Must be entered by the owner, who is personally liable for breach of any contract. Tort Liability o Owner is personally liable for torts committed by employees Profit Sharing and Decision Making in a Sole Proprietorship Owners bears all of the risks of failure Owners has all decisions making authority and can made decisions quickly and independently. Sources of Capital, Taxation and Transferability in a Sole Proprietorship Have limited access to capital due to sole ownership. Access to capital is limited to owner's own assets and any credit available to the owner. Not a legal entity therefore all profits and losses are reported on the owner's personal income tax return and taxed at the owner's tax rate. Cannot be transferred or sold because it is not a legal entity, but its assets may be sold. Regulation of Sole Proprietorships No formal requirements to form; one simply begins business activity. Subject to the same regulation as any other form of business  Some specialist may require license to practice for lawyers, doctors, electricians. Some industries and forms of business are subject to regulation—for example, door-to-door selling and interprovincial trucking. Municipalities may impose registration or licensing requirements. The name must be registered if the business uses a name other than the owner’s name. Pros and Cons Pros: Simple Speed and independence Profit motive Lower costs Tax benefits ( can claim business expenses) Control over decision making Cons Unlimited personal liability Working alone (can have employees) Limited access to capital Limited lifespan Tax disadvantages (must claim all business income with personal taxes) Partnership Business carried on by two or more persons with the intention of making a profit. Similar with sole proprietorship No special steps to create. Financial Liability in a Partnership Each owner has unlimited personal liability for the entire debt of the partnership, not just a proportion of the debt, but they are entitled to be reimbursed from the other partners for their share of the debt. Joint liability: liability shared by two or more people where each is personally liable for the full amount of the obligation. Each partner is liable for any breach of contract by the business Personal assets of the partners are available to satisfy any depts of the business. Profit Sharing and Decision Making in a Partnership The partners decide how profits and firm assets are to be divided. Decision making is by majority. Sources of Capital, Taxation, and Transferability of Partnerships More owners give the partnership access to more capital availability  Any income from the partnership business is allocated to the partners on the basis of their interest in the partnership, and they must, in turn, include it on their individual tax returns. Partners do not individually own or have a share in specific partnership property. Each partner has an interest in all partnership property. Agency and the Partnership Act Partnership is based on contract law, agency law, and provincial partnership legislation. Provincial partnership legislation defines when a partnership exists and what the relationship of partners is to the outside world. Provincial partnership legislation has optional rules (subject to an agreement to the contrary) for the relationship of the partners to one another and how the partnership ends. Formation of a Partnership Common Purpose: two or more people working together to make money. Legal Recognition: Court looks at actions, not just labels. Partnership by Conduct: Acting like a partner (sharing profits, managing, investing) can create a partnership. Joint Ownership: Owning property together doesn't automatically create a partnership. Relationship Between Partners Agent-Principal Relationship: Partners are agents of each other and the firm. Fiduciary Duty: Partners must act in the best interest of the partnership. No Self-Dealing: Partners can't use partnership opportunities for personal gain. Partnership Agreements Recommended but Not Required: A written agreement can clarify terms. Key Terms: Partnership name, contributions, profit/loss sharing, management, decision- making, dissolution, dispute resolution, etc. Relationship with Outsiders Partner as Agent: Partners can bind the partnership to contracts. Joint and Several Liability: Partners are individually and collectively liable for partnership debts and torts. Pros and Cons of Partnerships Pros Simple Lower cost Greater access to capital  Profit motive Tax benefits Cons Unlimited personal liability Loss of speed and independence Limitations on transferability Profit sharing Tax disadvantages How and Why a Partnership Ends Automatic Termination: Fixed term ends Specific venture ends Partner gives notice Partner dies, becomes insane, or goes bankrupt Agreement: Partners can agree on di+erent terms for ending the partnership. Winding Up: Process of selling assets, paying debts, and distributing remaining funds to partners. Limited Partnership Partnership in which the liability of some of the partners is limited to their capital contribution. Written Agreement: Required for registration. Liability: General partners have unlimited liability; limited partners have limited liability. Limited Partner Rights: Share profits, get capital back, but can't manage. Loss of Limited Liability: If a limited partner gets involved in management, they risk losing their limited liability. Limited Liability Partnership Partnership in which partners have unlimited liability for their own malpractice but limited liability for other partners' malpractice. Hybrid Structure: Combines elements of partnerships and corporations. Limited Liability: Partners have limited liability for the debts and obligations of the LLP. Professional Use: Often used by professionals (e.g., lawyers, accountants) who can't incorporate. Jurisdictional DiIerences: The specific rules and protections for LLPs vary by jurisdiction. Corporation Separate legal entity in law and capable of assuming its own obligations.  Safest for conducting business because owners have limited liability Limited liability: responsibility for obligations restricted to the amount of the investment. Most important form of business organization today. Managed by a board of directors elected by the shareholders. Shareholder: a person who has an ownership interest in a corporation. Director: person elected by the shareholders to manage a corporation Profit Sharing, Decision Making and Sources of Capital in a Corporation Profits are given to shareholders through dividends. Dividends: a division of profits payable to shareholders. Corporation is managed by board of directors who may hire o+icers to assist in running the corporation Obtains capital by borrowing or selling shares. Share represents a unit of ownership in the corporation and provides an opportunity to earn dividends and an increase in share value. In the event of business failure, creditors are paid ahead of shareholders. Taxational and Transferability of Ownership in a Corporation Separate Legal Entity: Pays its own taxes, separate from shareholders. Tax Advantages: Strategic distribution of dividends and salaries can reduce tax burdens. Limited Liability: Shareholders are not personally liable for corporate debts. Transferability of Shares: Shares can be easily bought, sold, or inherited. Restrictions: Some corporations may have restrictions on share transfer. Perpetual Existence and Regulations Perpetual Existence: The corporation continues to exist even if shareholders die or go bankrupt. Subject to General Laws: Corporations must adhere to laws like tax laws, employment laws, and environmental regulations. Pros and Cons Pros Limited liability Flexibility Greater access to capital Continuous existence Tax benefits Transferability Potentially broad management base Cons Higher cost Public disclosure  Greater regulation Dissolution Tax disadvantages Possible loss of control Potential bureaucracy Comparison of Major Forms of Business Organization Business Arrangements: The Franchise Contractual Agreement: Franchisor grants rights to franchisee to use brand and business model. Trademark Rights: Franchisor owns the brand and allows franchisee to use it. Operational Guidelines: Franchisor provides guidelines for running the business. Financial Obligations: Franchisee pays fees and royalties to the franchisor. Limited Fiduciary Duty: The relationship is primarily contractual, not fiduciary. Business Arrangements: Joint Venture Business Association: Two or more entities collaborate on a specific project or venture. Profit and Loss Sharing: Shared benefits and risks. Flexible Structure: can be partnership, equity joint venture, or contractual arrangement. Business Arrangements: Strategic Alliance A strategic alliance is a partnership between businesses that may involve joint research, technology sharing, or joint use of productions. The relationship is usually contractual in nature. For example, KPMG in Canada has a number of alliances with leading technology, data, and services companies to help clients with a variety of issues, such as cybersecurity, blockchain technology, digital labor, and regulatory change. Business Arrangements: Distributorship or Dealership These are similar to a franchise and usually arise when one party agrees to sell products or provide services prescribed by a manufacturer. It is often seen in the automotive and computer industries. The relationship is governed by a contract. Normally there is no agency or fiduciary relationship. Sources and related content Business Arrangements: Sales Agency Sales Agency: an agreement in which a manufacturer or distributor allowed another to sell goods or services on its behalf. The agent is not the vendor but acts on behalf of the owner of the goods or services. Fiduciary obligations are owed. This arrangement is often seen in the travel, real estate, and insurance industries. Business Arrangements: Product Licensing product licensing: An arrangement whereby the owner of a trademark or other proprietary right grants to another the right to manufacture or distribute products associated with the trademark or other proprietary right. The relationship is contractual. It is common in clothing, sporting goods, and merchandise connected to the entertainment industry. The Corporate Form: Organizational Matters Canadian Business and the Law, EIGHTH EDITION The Corporation Defined The corporation is the predominant business vehicle in modern commerce. It is a separate legal entity and is treated as a legal person. The corporation alone is responsible for its own debts and other liabilities.  The shareholders are not responsible for a corporation’s default on its liabilities. 2Landmark Case 15.1 (1) Salomon v Salomon Ltd, AC 22 (HL) Salomon carried on a profitable shoe-manufacturing business and formed a corporation to run the business. He and his family were the only shareholders, with Salomon owning 20 001 shares and family members owning 6 shares. Salomon fully controlled the corporation and was also a secured creditor of the corporation. The business suffered financial problems and became insolvent. 3Landmark Case 15.1 (2) Salomon v Salomon Ltd, AC 22 (HL) Creditors sought to collect their debts from Salomon personally, suggesting it was improper for an individual to conduct his business through a one-person corporation to secure limited liability. Resolution: o House of Lords confirmed that there is nothing wrong with a shareholder being a creditor of the corporation, even when that shareholder essentially controls the company in question. o Creditors knew they were dealing with a limited liability company on an unsecured basis. 4Stakeholders in the Corporation (1) stakeholder: One who has an interest in a corporation.  Internal stakeholders are individuals or groups who have a direct or indirect role in governing the corporation, and determining its mission and how that will be achieved, such as shareholders, directors, and officers. o officers: High-level management employees appointed by directors who manage day-to- day operations of the corporation. ▪ Examples: president, secretary, treasurer Stakeholders in the Corporation (2) 5 External stakeholders are people who have dealings with the corporation but without a role in its governance. o Examples: customers, employees, creditors, government Corporation law seeks to regulate the relationships among the corporation’s internal stakeholders, whose interests may at times conflict with one another. Pre-Incorporation Issues 6 Decisions that must be made include the following: o whether to incorporate federally or provincially o what type of shares will be available and to whom o what to name the corporation Provincial and Federal Incorporation 7 Both levels of government have passed legislation that provides for the incorporation of companies. Federally incorporated corporations have a right to carry on business in each province.  Provincially incorporated corporations have the right to carry on business only in the province in which they are incorporated but can be licensed to carry on businesses in other provinces. Shares and Shareholders (1) 8 The incorporators must decide on a share structure. A share represents an ownership interest in the issuing corporation. o Shareholders do not have the right to use the assets of the corporation or any right to directly control or manage the corporation. o Shareholders have those rights that specifically attach to their share. share structure: The class or classes of shares the corporation will issue, their rights and privileges, and the number issued. Shares and Shareholders (2) 9 A corporation may have one type or class of shares, which will have all the basic shareholder rights attached to it: o the right to vote for the election of directors o the right to receive dividends declared by the directors o a right to a share in the proceeds on dissolution of the corporation, after the creditors have been paid 10 Shares and Shareholders (3) Typically, the share structure will include different classes of shares which may include a combination of the following various rights and privileges: o voting rights o financial rights o preference rights o cumulative rights o redemption rights The number of shares can be limited to a particular number of shares or left open-ended (unlimited). 11 Availability of Shares (1) widely held corporation: A corporation whose shares are normally traded on a stock exchange. o Widely held corporations are subject to regulation pursuant to the relevant securities legislation. o Shares are normally available to the public. 12 Availability of Shares (2) closely held corporation: A corporation that does not sell its shares to the public. o This is the most common form of corporation and is commonly referred to as a “private corporation.” o They are not subject to securities legislation as long as they meet private corporation requirements, such as a limited number of shareholders. o They may be subject to a lower tax rate. o Examples: McCain Foods, Irving companies, Holt Renfrew 13 Who May Own Shares? A share is a piece of property and is freely transferable unless there is a restriction in place.  In widely held corporations, shares are almost always freely transferable. In closely held corporations, it is common to have a provision in the incorporating documents that shares cannot be transferred without the agreement of the directors or a majority of the shareholders of the corporation. o “A right of first refusal” means that the shareholder wishing to sell must first offer their shares to the directors (or shareholders) at the same price they have negotiated with the outsider. o This gives the insiders one last chance to acquire the shares for themselves instead of having to welcome a new investor to the company. Business Application of the Law 15.1 14 (1) Rogers Communications and Dual-Class Shares Rogers was founded by Ted Rogers in 1960, with a dual-class share structure which included voting shares and non-voting shares. After his death in 2008, Edward Rogers (chair of the Board of Directors) attempted to terminate the CEO, against the wishes of fellow board members, which included other family members. The board blocked the plan and voted to remove Edward as chair of the board. Edward then replaced 5 of the 14 directors, who reinstated Edward as chair.  Business Application of the Law 15.1 15 (2) Rogers Communications and Dual-Class Shares How was this possible? o Ted had left the voting shares to a trust for his family; Edward was the chair of the trust. o Rogers Control Trust held 97 percent of the outstanding Class A Voting shares and approximately 9 percent of the Class B Non-Voting Shares of RCI. o The Class B shares pay dividends but had no voting rights. o Although the trust owned less than 30 per cent of the company’s equity, it controlled more than 97 percent of the votes. A Corporate Name (1) 16 All jurisdictions require a company to be identified by a name or designated number. The corporation’s name must o be distinctive o not cause confusion with any existing name or trademark o include a legal element (Ltd, Corp, Inc, etc.) o not include any unacceptable terms A Corporate Name (2) 17 Care must be taken when selecting a name. o If the name that is confusingly similar to the name of another business, the entrepreneurs can be sued for trademark infringement and the tort of passing off. o They will be liable for any damages that the other business has suffered and perhaps be ordered to change the name of their corporation.  Instead of a distinctive name, corporations can have a numbered name, followed by Canada, Ltd, Inc, etc. o shelf company: A company that does not engage in active business. ▪ Often incorporated by law firms for future use by their clients. Case 15.1 (1) 18 Aquatera Utilities Inc v Aquaterra Water Management Inc, 2018 ABQB 962 Aquatera Utilities Inc was incorporated in Alberta and acquired its name in 2003. o Aquatera Utilities’s head office is in Grande Prairie and provides water, sewer, waste handling, and recycling services to Grande Prairie and the greater Peace River Country region. Aquaterra Water Management Inc (Aquaterra Water) changed its name to Aquaterra Water in 2014. o It operated in oilfield waste management and water disposal for the petroleum industry. Its head office is in Red Deer, and operates in Alberta, Saskatchewan, British Columbia, North Dakota, and Texas. Case 15.1 (2) 19 Aquatera Utilities Inc v Aquaterra Water Management Inc, 2018 ABQB 962 Aquatera Utilities requested that the Corporate Registrar direct Aquaterra Water to change its name.  In 2016, the Registrar found the names were confusingly similar in contravention of the Business Corporations Act and associated regulations and directed Aquaterra Water to change its name. Case 15.1 (3) 20 Aquatera Utilities Inc v Aquaterra Water Management Inc, 2018 ABQB 962 Court: Upheld the registrar’s decision. o Identical names were not required; rather, the focus is whether it is reasonable to find that persons interested in dealing with one business would instead deal with the other similarly named business, having regard to the given factors. o In determining that the names were similar and caused confusion, the following factors were considered: distinctiveness of the name Aquatera, length of time used (2003 v 2014), similarity in nature of the business, degree of similarity in appearance and sound, and overlap of the geographic areas where the name is likely to be used. The Process of Incorporation (1) 21 The processes across Canada vary but are similar. incorporator: The person who sets the incorporation process in motion. articles of incorporation: The document that defines the basic characteristics of the corporations in Newfoundland and Labrador, New Brunswick, Alberta, Saskatchewan, Manitoba, Ontario, and federal jurisdiction. The Process of Incorporation (2) 22  The process can differ across provinces, but generally the process is as follows: o Submit articles of incorporation. ▪ defines basic characteristics of the corporation o Submit a Notice of Registered Office. ▪ lists the address of the corporation o Submit a Notice of Directors. ▪ names and addresses of the directors o Submit a NUANS report. ▪ to search for similar names already in use o Pay a filing fee. Organizing the Corporation 23 Once incorporated, directors will meet to start things up, including doing the following: o make bylaws ▪ bylaws: Rules about day-to-day operating procedures of the corporation. o adopt forms of share certificates o authorize the issue of shares and securities o appoint officers o make banking arrangements The first meeting of shareholders must happen within 18 months of incorporation to elect directors. Financing the Corporation 24 Two methods exist for financing the corporation so it can operate: o debt financing o equity financing securities: Shares and bonds issued by a corporation. Debt Financing 25  A corporation can raise money by borrowing from banks, family, shareholders, and government. Bonds and debentures give the lender a charge on assets of the corporation, if the debt is not repaid. o bond: A document evidencing a debt owed by the corporation, often used to refer to a secured debt. o debenture: A document evidencing a debt owed by the corporation, often used to refer to an unsecured debt. These do not result in an ownership interest in the corporation. On insolvency, holders are entitled to repayment before shareholders. Equity Financing 26 A corporation can raise money by selling shares. Equity financing results in an ownership position. o Shares are issued to investors in exchange for a purchase price. o This provides a flexible means of raising capital. o It provides investors an opportunity to benefit from the corporation’s growth. Corporations can combine shares and bonds to raise money, and some can be given conversion rights. o conversion rights: The right to turn one type of security into another type. On insolvency, shareholders are entitled to share in the proceeds after all creditors are paid. Business and Legislation 15.1 (1) 27 Crowdfunding  Crowdfunding funds a venture through soliciting small amounts of money from a large amount of people. o This is usually done online, with a pitch from the entrepreneur. The three models of crowdfunding: o Donation model: The lender receives nothing in return. o Lending model: The lender will be repaid. o Investment/equity model: The lender receives equity in return for financing. Business and Legislation 15.1 (2) 28 Crowdfunding In 2021, the Canadian Securities Administrators (CSA) approved a harmonized national framework for start-up crowdfunding. o Eligible issuers can raise up to $1.5 million (up from $500 000 in some jurisdictions) in any 12-month period. o An individual can invest $2500 (up from $1500 in some jurisdictions) or $10 000 if a registered dealer has provided advice. Securities Legislation (1) 29 The aims of all securities legislation are the following: o It provides the mechanism for the transfer of securities. o It ensures investors can access information needed to make informed decisions. o It ensures the system is such that the public has confidence in the marketplace. o It regulates those engaged in the trading of securities. o It removes or punishes those participants not complying with established rules.  Business and Legislation 15.2 30 A Co-operative National Securities Regulator Canada has 13 provincial and territorial securities regulators. In 2013, the federal government launched the Cooperative Capital Markets Regulatory System to administer a single set of rules and regulations to regulate the Canadian market. In 2018, the Supreme Court of Canada unanimously ruled that the Cooperative System does not improperly fetter the provinces’ sovereignty and falls within Parliament’s general powers to regulate trade and commerce. The federal government was unable to get opposition support to budget the funding of the organization. Securities Legislation (2) 31 All Canadian securities regimes have three basic requirements: registration, disclosure, and insider-trading restrictions. o Registration: Any company intending to sell securities to the public in a given province must be registered to do so with the relevant provincial securities commission. o Disclosure: The company must comply with disclosure or prospectus provisions. ▪ prospectus: The document a corporation must publish when offering securities to the public. The purpose of a prospectus is to ensure full, true, and plain disclosure of facts that are likely to affect the price of the securities.  Securities Legislation (3) 32 An issuer of securities has an obligation to continue to keep the public informed of its activities and must notify the public of any material change in its affairs. Investors who suffer losses in connection with misrepresentations or omissions by a company have, in addition to common law causes of action, a statutory right of action. Case 15.2 33 Wong v Pretium Resources Inc, 2022 ONCA 549 Investors sought leave to sue in a class action. They alleged losses on the secondary market because Pretium Resources Inc failed to disclose in a timely manner an unsolicited negative opinion about a gold mining project (which was later determined to be unreliable and erroneous). Court of Appeal: o There was no omission of a material fact. o The policy objectives of the continuous disclosure regime are not served by the flooding the market with unreliable information and leaving it up to investors to determine what is valid information. Insider-Trading Restrictions 34 insider trading: Transactions in securities of a corporation by or on behalf of an insider on the basis of relevant material information concerning the corporation that is not known to the general public.  insider: A person who has access to relevant material about a corporation. o They must report any trading in which they are engaged. o They must not pass on information to a tipee. ▪ tippee: A person who acquires material information about an issuer of securities from an insider. The Criminal Code also includes insider-trading and tipping offences. Case 15.3 35 Finkelstein v Ontario (Securities Commission), 2018 ONCA 61 Prominent mergers and acquisitions lawyer and four investment advisors were convicted by the Ontario Securities Commission (OSC) of tipping and insider trading. OSC was able to prove tipping and insider trading on the basis of circumstantial evidence such as frequency and date of phone calls, the pattern of trades, and the dates of trades. The OSC imposed a total of $2.9 million in penalties, costs, and disgorgement orders against the parties. The lawyer received a 10-year trading ban, a lifetime ban on becoming an officer or director of a public corporation, a $450 000 administrative penalty, and $125 000 in costs. 36 The Corporate Form: Operational Matters Canadian Business and the Law, EIGHTH EDITION Objectives After studying this chapter, you should have an understanding of the liabilities of a corporation the duties and liabilities of corporate directors and officers the rights and liabilities of shareholders and creditors how the corporation is terminated Corporate Liability: Liability in Tort (1) 2 A corporation is a legal person in the eyes of the law. It is responsible for its own actions, acting through human agents. A corporation may have primary or vicarious tort liability. o Primary liability arises when the corporation is regarded as the entity that committed the tort. o Vicarious liability arises when a tort has been committed by an agent or employee who is not a directing mind of the corporation. Corporate Liability: Liability in Tort (2) 3 identification theory: A theory specifying that a corporation is liable when the person committing the wrong is the corporation’s directing mind. directing mind: An individual who exercises decision making authority in matters of corporate policy. o Generally, it is the highly placed corporate officers who are classified as “directing” minds, while low-level employees are not. o A corporation may have more than one directing mind. Corporate Liability: Liability in 4 Contract Agency law largely determines when a corporation is liable on a contract and when it is not. The corporation will be bound by the contract as long as the corporate agent had actual or apparent authority. To avoid personal liability, the person signing a document on behalf of a corporation should ensure that the contract clearly indicates the person is signing on behalf of the corporation and not in their personal capacity. o It is best to avoid “pre-incorporation” contracts and use shelf corporations instead. 5Corporate Liability: Criminal and Regulatory Liability (1) Criminal liability problem: How can a corporation be punished or jailed?—it has no body. Identification theory has been adapted to criminal law: o A corporation has committed the crime if the person who committed the crime was a directing mind of the corporation and committed it in the course of their duties to the corporation. Criminal law expands the range of individuals whose actions can trigger liability of the corporation to include senior officers. 6Corporate Liability: Criminal and Regulatory Liability (2) For intentional criminal offences: o The corporation will be liable if a senior officer, acting in the scope of their authority and intending at least in part to benefit the corporation, engages in unsafe conduct, directs representatives to do it, or knows about the unsafe conduct but does nothing, and death or injury results. For offences based on negligence: o The corporation can be convicted if any representative causes injury or death by unsafe conduct, and the senior officer or officers in charge of the activities of the representative depart markedly from the reasonable standard of care necessary to prevent the incident. Business Application of the Law 16.1 7 Death in the Workplace Four workers died, including the supervisor, when the scaffolding broke 13 storeys above ground. Five parties were found guilty of safety-related offences: o The supervisor had permitted the work without sufficient safety harnesses and permitted the use of marijuana. o A director was convicted of breach of the Occupational Health and Safety Act. o The project manager was sentenced to 3.5 years imprisonment for criminal negligence for allowing workers to board the scaffold when he was aware of insufficient fall protections. o Liability was also imposed on the scaffolding company and one of its directors. Corporate Liability: Regulatory 8 Offences regulatory offence: An offence contrary to the public interest. A corporation and sometimes its directors and officers face may penalties, including civil liability for damages. Corporations face liability in many areas, including the following: o taxation o human rights o pay equity o employment standards o consumer protection o unfair or anticompetitive business practices o occupational health and safety o environmental protection Directors and Officers 9 Directors are elected by shareholders, and manage or supervise the management of the business and the affairs of the corporation. o In addition to this general authority, directors have specific powers and obligations set out in legislation. ▪ Examples: declare dividends, call shareholder meetings, adopt bylaws, and issue shares o Directors can appoint officers to carry out many of their duties and exercise most of their powers. ▪ This does not relieve the directors of ultimate responsibility for the management of the corporation. Business and Legislation 16.1 (1) 10 Corporate Governance and Diversity Canada now requires some public corporations to disclose diversity information other than gender. The law applies to corporations incorporated under the CBCA and that have publicly traded securities. o The law requires disclosure of the number/percentage of the board of directors and senior management who are women, Aboriginal persons, members of visible minorities, and people with disabilities. Business and Legislation 16.1 (2) 11 Corporate Governance and Diversity o The amendments do not impose quotas or any specific diversity requirements but instead introduce a “comply or explain” regime. o Corporations are required to disclose if they have a diversity and inclusion policy, and if not, to provide an explanation why.  Duties of Directors and Officers 12 Directors and officers owe two types of broad duties: fiduciary duties and competence. Fiduciary duties include the following: o Directors and officers must act honestly and in good faith. o They cannot favour one group of shareholders over another, as their obligation is to the corporation as a whole. o They must not allow personal interest to conflict with their duty to the corporation. o They cannot intercept a corporate opportunity—a business opportunity in which the corporation has an interest. Duties of Directors and Officers: The 13 Fiduciary Duty Self-dealing contract: A contract in which a fiduciary has a conflict of interest. o Example: A director has materials on hand that the corporation could purchase—the director has a duty to get a good price, but personally would want to sell for a high price. o There are provisions that allow self-dealing contracts, because some might be beneficial to the company. Corporate opportunity: A business opportunity in which the corporation has an interest. o These are opportunities that, if the directors and officers were permitted to take up for themselves, would present a conflict similar to a self-dealing contract.  Landmark Case 16.1 14 Canadian Aero Service Ltd v O’Malley, 1973 CanLII 23 (SCC) Two corporate officers had been negotiating to win an aerial mapping contract. Both officers left to set up their own company, which began to pursue the very same line of work as their former employer, and successfully bid on the contract. Court: o The executives were liable to account to former employer for the profits they made under the contract. o They had breached their fiduciary duties by taking something that belonged to the corporation. Ethical Considerations 16.1 (1) 15 Corporate Social Responsibility and the Evolution of Director’s Fiduciary Duty Voluntary actions by a corporation in an economic, social, and environmentally sustainable manner are becoming more common on agendas of corporations CSR is underpinned by the notion that business is accountable to a wide range of stakeholders, including employees, suppliers, customers, government, non-governmental organizations, and the community. Example of CSR: Maple Leaf Foods launching Maple Leaf Centre for Action on Food Security, to reduce food insecurity in Canada. Ethical Considerations 16.1 (2) 16 Corporate Social Responsibility and the Evolution of Director’s Fiduciary Duty In 2019, the Canada Business Corporation Act (CBCA) was amended to codify the permissive standard for fiduciary duty: o When acting with a view to the best interests of the corporation under paragraph (1) (a) the directors and officers of the corporation may consider, but are not limited to, ▪ the interests of shareholders, employees, retirees and pensioners, creditors, and consumers, and governments; the environment; and the long-term interest of the corporation The Duty of Competence 17 Directors and officers must exercise the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances. Case 16.1 (1) 18 Peoples Department Stores Inc (Trustee of) v Wise, 2004 SCC 68 Wise Stores Inc was a publicly traded company and operated 50 junior department stores in Québec with annual sales of $100 million. Majority shareholders were the Wise brothers. In 1992, Wise Inc acquired all of the shares of Peoples Department Stores, and the Wise brothers became its sole directors. The companies were doing poorly. The Wise brothers implemented a joint inventory purchasing policy on the recommendation of the companies’ vice-president of administration and finance. Case 16.1 (2) 19 Peoples Department Stores Inc (Trustee of) v Wise, 2004 SCC 68 Peoples purchased and paid for most of Wise Inc’s inventory, subject to reimbursement by Wise Inc. Peoples ended up extending large amounts of trade credit to Wise. Both companies went bankrupt. Trustee in bankruptcy, representing the interests of the unpaid creditors, sued the Wise brothers, alleging that in implementing the joint inventory procurement program, they breached their duties as directors of Peoples. Case 16.1 (3) 20 Peoples Department Stores Inc (Trustee of) v Wise, 2004 SCC 68 SCC: o Wise brothers did not owe a fiduciary duty to the creditors and owed their fiduciary duty only to the corporation. o Creditors can pursue an action based on breach of the duty of care. o The court endorsed the “business judgment rule” in assessing whether directors have fulfilled the duty of care. The rule holds that the court will not second-guess business judgments that are made honestly and on the basis of reasonable information. Liabilities of Directors and Officers 21  Generally, if a director commits a tort, it will be attributed to the corporation, by virtue of identification theory. Similarly, if a director (acting as agent of the corporation) breaches a contract, the actions will be attributed to the corporation. There are times when directors and officers have personal liability for a tort or contract. Liabilities of Directors and Officers: 22 Liability in Tort Courts do not agree on when the actions of a director, when carrying out their duties, can result in personal liability. But courts do agree that there can be personal liability. Directors and officers should take care not to commit torts. Liabilities of Directors and Officers: 23 Liability in Contract A director faces personal liability on a contract if the actions show that the director intended to assume personal liability: o The director contracts on their own behalf and on behalf of the company. o The director guarantees the contractual performance of the company. Liabilities of Directors and Officers: 24 Liability by Statute Statutes place obligations on directors, which, if not adhered to, can result in being personally liable. o Example: The Canadian Environmental Protection Act states that directors who participate in an offence may also be guilty of the offence. Other statutory breaches include the following: o failure to pay employee wages o failure to remit required taxes o insider trading o improperly transporting dangerous goods Case 16.2 (1) 25 Midwest Properties Ltd v Thordarson, 2015 ONCA 819, leave to appeal dismissed 2016 CanLII 30455 (SCC) Midwest purchased an industrially zoned property and building. Midwest became interested in acquiring the adjoining property owned by Thorco Contracting Limited, which was controlled by John Thordarson. Midwest’s environmental studies found PHC contamination on both properties caused by Thorco activities. Case 16.2 (2) 26 Midwest Properties Ltd v Thordarson, 2015 ONCA 819, leave to appeal dismissed 2016 CanLII 30455 (SCC) Thorco had breached orders related to the storage of the PHCs. Thorco and Thordarson had been convicted of environmental offences and had not complied with orders to clean up the property purchased by Midwest. Midwest was successful in suing Thordarson for damages, in his personal capacity, pursuant to the EPA, as the individual who controlled the pollutants. o Midwest sued for nuisance and negligence, pursuant to s 99 of the EPA (Ontario). Business Application of the Law 16.2 27 (1) Avoiding the Risk of Personal Liability Directors can reduce their exposure to personal liability by exercising care, diligence, and skill in their duties. Directors can meet the statutory standard of care by being attentive, active, and informed. In this regard, directors should o regularly attend directors’ meetings o read all relevant materials o ask questions and speak up at meetings o keep personal notes of meetings and review minutes of meetings Business Application of the Law 16.2 28 (2) Avoiding the Risk of Personal Liability Directors should (cont’d) o make all their decisions informed decisions o do what is necessary to learn about matters affecting the company o identify possible problems within the company o stay apprised of and alert to the corporation’s financial and other affairs o ensure that they receive reliable professional advice Directors should ensure an indemnification agreement with their company is in place. Directors should have D& O insurance. Shareholder Liability (1) 29 Shareholders have few responsibilities with respect to the corporation. Unlike directors and officers, the shareholder has no duty to act in the best interests of the corporation. A shareholder o can freely compete with the corporation o is not obligated to attend shareholder meetings, cast their vote, read the corporation’s financial reports, or take any interest whatsoever in the progress of the corporation o is not generally liable for the debts and obligations of the corporation because of the principle in Salomon Shareholder Liability (2) 30 lifting the corporate veil: Determining that the corporation is not a separate legal entity from its shareholders. This is rarely done by the courts, except when they are satisfied that a company is a “mere facade” concealing the true facts. It must be shown that there is complete domination and control by the shareholder, and that the corporate form must have been used as a shield for conduct akin to fraud. Business Application of the Law 16.3 31 (1) Yaiguaje v Chevron and Piercing the Corporate Veil From 1964 to 1992 in Ecuador, Texaco dumped billions of litres of toxic oil-drilling waters into open-air pits. The contamination had devastating effects on the rain forest and rivers and caused long-term adverse health effects on residents. Chevron had acquired Texaco and was ordered by the Ecuadorian Court to pay US$9.5 billion in damages. Chevron refused to pay the award and as it no longer had assets in Ecuador. Business Application of the Law 16.3 32 (2) Yaiguaje v Chevron and Piercing the Corporate Veil US courts refused to enforce the judgment in the United States. A claim against Chevron Canada (CC) was rejected on the basis that it was a different entity from Chevron. The Canadian court also refused to lift the corporate veil, holding there was insufficient evidence to suggest the CC was a mere puppet of Chevron. Shareholder Rights 33 There are three categories of shareholder rights: o right to vote o right to information o financial rights Different classes of shares allow for different rights associated with them, and different levels of shareholder participation in the corporation. Classes of Shares 34 common share: A share that generally has a right to vote, share in dividends, and share in proceeds on dissolution. preferred share: A share or stock that has a preference in the distribution of dividends and the proceeds on dissolution. Shareholder Right to Vote 35 The shareholder’s right to vote includes the following rights: o one shareholder general meeting each year o be given notice of the meeting o attend the meeting o ask questions o introduce motions o have a proxy ▪ proxy: A person who is authorized to exercise a shareholder’s voting rights. Shareholder Right to Information 36 The right to information includes the following rights: o inspect the annual financial statements o apply to the court to have an inspector appointed if it can be shown there is serious concern about mismanagement o inspect certain records, including minute books o know whether directors have been purchasing shares of the corporation  Shareholder Financial Rights 37 Financial rights include the following rights: o the right to receive any dividend declared by the corporation o share in the assets of a corporation on dissolution may include pre-emptive rights pre-emptive rights: A shareholder’s right to maintain a proportionate share of ownership by purchasing a proportionate share of any new stock issue. Shareholder Remedies 38 Shareholders have remedies available to them if they are dissatisfied with the corporation: o sell shares (easy in public corporations; may come with restrictions in private ones) o dissent and appraisal right: The right of shareholders who dissent from certain fundamental changes to the corporation to have their shares purchased at a fair price. o derivative action: A suit by a shareholder on behalf of the corporation to enforce a corporate cause of action. o oppression remedy: A statutory remedy available to shareholders and other stakeholders to protect their corporate interests. ▪ It is used when the actions of the corporation have oppressed or prejudiced interests of shareholders. ▪ This is the most widely used remedy. Other Shareholder Remedies 39 (Optional)  Shareholders’ agreement: An agreement that defines the relationship among people who have an ownership interest in a corporation. Unanimous shareholders’ agreement (USA): An agreement among all shareholders that restricts the powers of the directors to manage the corporation. o This ensures control remains with the shareholders. Case 16.3 (1) 40 Mennillo v Intramodal Inc, 2016 SCC 51 Intramodal was owned by Menillo and Rosati. They conducted their affairs informally and did not often comply with the formal requirements of the CBCA. For example, when shares were issued, neither party paid for them and Mennillo’s share certificate was not signed. They rarely put anything in writing, among other things. As court noted, “this was a two-person, private company in which the dealings between the parties were marked by extreme informality.” Menillo wished to resign from the corporation as director and officer. Case 16.3 (2) 41 Mennillo v Intramodal Inc, 2016 SCC 51 Mennillo commenced an oppression action against Intramodal and Rosati, alleging that he had been wrongfully removed as a shareholder as proper CBCA procedures were not followed. Court: o Although Intramodal failed to comply with corporate law formalities in registering the transfer of shares, the SCC affirmed that oppression is judged by “business realities,” not “narrow legalities.” o The courts will consider the oppression remedy in context, assessing the parties’ reasonable expectations based on the nature of their relationship and how they conducted business. Business Application of the Law 16.4 42 (1) Managing Risk Through Shareholders’ Agreements Agreements allow the shareholders to do the following: o define their relationship o provide mechanisms if the relationship encounters problems o provide means for undoing the relationship Business Application of the Law 16.4 43 (2) Managing Risk Through Shareholders’ Agreements Agreements should address the following: o management of the company o protection for the minority shareholders o control over who the other shareholders are o provision of a market for shares o capital contribution o buy–sell arrangements in case of dispute 44 Creditor Protection (1) A corporation is responsible for its own liabilities, including debts. o But shareholders cannot strip a corporation of its assets in order to avoid paying creditors. ▪ This is illegal, and creditors have a priority claim over shareholders to the assets on insolvency. Creditor Protection (2) 45 The Canada Business Corporation Act includes provisions that prevent abuses by shareholders, such as the following: o a corporation paying dividends to shareholders if doing so would jeopardize its ability to pay its own debts as they fall due o paying dividends if that would make the company insolvent Supreme Court has stated directors also owe duty of care to creditors. o Creditors can use the oppression remedy to protect from prejudicial conduct by directors. Termination of the Corporation 46 Corporations can be terminated in different ways: o winding up: The process of dissolving a corporation. ▪ This is a complex process. o lapse: The corporation neglects to file an annual report or to follow other reporting requirements. ▪ This is simple and results in company being struck from corporate register. o Courts can order a company terminated if it is the only way to do justice between the corporation and its shareholder(s). o Corporations can go bankrupt, resulting in termination. 47