Business Organizations Summary
THE LAW OF BUSINESS ORGANIZATIONS Chapter 16 – Law of Sole Proprietorship and Partnership * Sole proprietorship – A business where the sole owner is responsible for the management and debts of the business. * Registration/licensing issues; Flexibility * Partnership – Partnership Act (Ontario) defines partnership as a relationship that subsists between two or more persons carrying on business in common with a view to profit. * Differences between partnership and co-ownership * Joint and several liability Partnership agreement – checklist of issues * Liability of partner for acts of employees * Rights and duties of partners to one another as set out in the Partnership Act (Ontario) * Dissolution of a partnership * Possible tax advantages of a partnership * Limited Partnership – Consists of a general partner and limited partner(s). A limited partner may not actively participate in the management of the firm, but has limited liability. A general partner is a full partner with unlimited liability for the debts of the partnership. Limited Liability Partnership – A partnership that is particularly suited to professional practices. The unlimited liability of each partner is maintained for the general debts of the partnership and for the partner’s personal negligence. Individual partners are not responsible for claims arising from the negligent acts or omissions of other partners. * Registration * Joint venture – A business relationship between corporations Chapter 17 – Corporation Law * Corporation – A fictitious legal person with its own separate existence * Governing legislation e. . CBCA, OBCA * Shareholder – Part owner of a corporation; a person who holds a share interest in a corporation * Director –Managing mind of corporation; a person elected by the shareholders of a corporation to manage its affairs * Outside directors * Officer – A person elected or appointed by the directors of a corporation to fill a particular office e. g. president, chief operating officer, corporate secretary, chief compliance officer * Limited liability * Transferability of shares * Corporate name – NUANS name search Methods of incorporation: royal charter, letters patent, special act, general act: memorandum of association/articles of incorporation * Incorporation process: filing application for incorporation together with fees; by-laws and resolutions; shareholders meetings; directors meeting * Indoor management rule: A party dealing with a corporation may assume that the officers have the valid and express authority to bind the corporation * Shareholders’ Agreements: An agreement between shareholders of a private corporation concerning management and/or future reorganization of the corporation such as buy-out of interests.
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Shareholders agreements are important especially for the protection of minority shareholders and to set up the ground rules for investors. * Checklist of issues arising in shareholders’ agreements * Share: Ownership of a fraction equity interest in a corporation * Floating charge: A commercial law concept; It refers to a debt security issued by a corporation in which assets of the corporation such as stock in trade are pledged as security. Until such time as default occurs, the corporation is free to dispose of its assets.
The floating charge is intended to facilitate commercial transactions. * Debenture: A debt security issued by a corporation that may or may not have specific assets of the corporation pledged as security for payment. * Directors’ Duties and Responsibilities – Every corporation must have at least one director. Certain directors may be officers of the corporation. Directors are responsible for the operation of the business. * A director is a fiduciary: he has a duty of utmost good faith.
As a result, in dealing with property he must act in the best interests of the person for whom he or she acts, rather than his or her own personal interest. As a general rule, in any transaction with the corporation, a director must disclose his or her interest in a particular contract and refrain from discussing or voting on the matter at the directors’ meeting. Shareholder approval of contracts in which a director has an interest may be required. A director must disclose a conflict of interest. Canadian Aero Service v. O’Malley et al (1973) Directors’ Liabilities – Numerous heads of director liability under various pieces of legislation: sell shares at a discount contrary to governing legislation; declare a dividend that impairs the capital of the corporation; environmental liabilities; employees wages in the event of a bankruptcy; failure to file corporate notices; Fraud charges under the Criminal Code; proceeds of crime and money laundering charges * Directors’ Defence of Due Diligence – Due diligence: the obligation on the directors of a corporation to ensure that effective systems are in place to comply with legislation, and to monitor legislative systems to ensure compliance. R. v. Bata sets out the criteria for the defence of due diligence. Ani Abdalyan, B. A. LL. B. LL. M. Member of the Ontario Bar Lead Instructor ALW 380 Business Law for Accounting * Business judgment rule – A court would be reluctant to interfere with the decisions of the board of directors. The rule is limited to circumstances where the directors can demonstrate they informed themselves of the issue and exercised real judgment. Peoples Department Stores v. Wise: Directors should act prudently and on a reasonably informed basis. Perfection is not demanded.
Courts are ill-suited and should be reluctant to second-guess the application of the business expertise to the considerations that are involved in corporate decision making, but they are capable, on the facts of any case, of determining whether an appropriate degree of prudence and diligence was brought to bear in reaching what is claimed to be a reasonable business decision at the time it was made. * Corporate Compliance -Sarbanes-Oxley Act * Shareholder rights: Full disclosure by the directors of business activities of the corporation; right to elect directors at general meetings of shareholders; right to approve the actions of directors since the previous annual meeting. Approve special by-laws.
Access to corporate records; Special meetings of shareholders may be convened for a variety of purposes relating to the corporation if a number of shareholders believe that the meetings are necessary. * Shareholders have remedies as set out in corporate legislation: CBCA – Derivative action – A shareholder may apply to court for permission to institute an action by satisfying the court that (1) reasonable notice was given to the directors of the shareholders’ intention to apply to the court if the directors failed to do so, and that the directors refused to act; (2) it would appear to be in the interests of the corporation that the matter be dealt with; and (3) the complainant shareholder is acting in good faith in making the application to court. Minority shareholders – Oppression remedy – A minority shareholder who believes that actions taken by the majority are repressive of the minority shareholders’ rights may apply to the court for relief. * Dissolution * Purchase and sale of a corporation: Purchaser may want asset purchase and vendor may want share purchase agreement * Share Purchase Agreement – Checklist of concerns * Asset Purchase Agreement – Checklist of concerns * Factors relevant to choosing the business form – sole proprietorship; agency, partnership; corporation. Ani Abdalyan, B. A. LL. B. LL. M. Member of the Ontario Bar Lead Instructor ALW 380 Business Law for Accounting Chapter 18 – Securities Regulation Security: A document or other thing that stands as evidence of title to or interest in the capital, assets, property, profits, earnings or royalties of any person or company, including any document commonly known as a security. Securities Act (Ontario) * Purpose and administration of securities regulation: two chief goals as follows: (1) providing protection to investors from unfair, improper or fraudulent practices, and (2) fostering fair and efficient capital markets and confidence in capital markets * USA has a single national securities regulator. A move in this direction for Canada would mean gains in efficiency and certainty. In Canada, securities regulation is a provincial responsibility. * Provincial administrators and Self Regulatory Organizations (SROs) – Balance financial transparency and market efficiency * Caveat emptor Registration: Any company or person acting as an intermediary in the trading of securities must be registered as a dealer or salesperson. * Disclosure: true, full and plain disclosure of all material facts relating to securities being issues * Prospectus: a public document required by law before securities are issued revealing material facts about that security and its issuer with such true, full and plain disclosure that a potential investor may make an informed decision as to the riskiness and price of that security. Reporting issuer – a corporation that has issued its shares to the public by way of a prospectus. * Checklist for public offering via prospectus Prompt offering qualification – short-form prospectus * Prospectus and registration exemptions – Prospectus disclosure would be an unfair hardship on some classes of issuers and investors “Accredited Investors”; “Private Issuers” or minimum investment amount of $150,000 National Instrument of the Canadian Securities Administrators * Continuous Disclosure – Make public disclosure on a continuous basis all material information that would significantly affect the valuation of its securities. * Canadian Depository for Securities Limited – System for Electronic Document Analysis and Retrieval (SEDAR) * Conduct of trading – “Know your client” rules Fraud on the Market – section 380 of the Criminal Code (Canada) * Insider Trading – The trading in shares of a corporation by a person in a corporation who possesses undisclosed privileged information about the corporation. * Tippee – Insider – Special relationship * Proxy voting and proxy solicitation * Takeover bids – An attempt by a competitor to obtain a controlling interest in a corporation * Investigation and Enforcement – termination of registrations, cease-trading orders in securities, withdrawal of exemptions, practice reviews, prosecutions etc. Ani Abdalyan, B. A. LL. B. LL. M. Member of the Ontario Bar Lead Instructor ALW 380 Business Law for Accounting