Sarah - Business Associations CAN

LAW 509 – Business Associations – Stewart – Fall 2021 PART I - INTRODUCTION BUSINESS ORGANIZATIONS Elements of Bargain Profitability is tied to bargains/contracts which engage purchase/sale of goods and services 4 Elements to Contract: 1) Risk – uncertainties identified by business, processed by risk management strategies a. Contracts allocate risk among parties – burden for certain risk falls upon particular party b. Insurance is purchased to mitigate risks w/in business arrangement 2) Return – net profits, or residual assets, after obligations for venture are satisfied a. Profits are divided between contracting parties as set out in contract b. Allocation of returns and risks provide information for parties to identify incentives, priorities and strategies 3) Control – degree of discretion - won through negotiations a. A party’s ability to exploit discretion to their advantage through maximizing the efficiency of their internal control system (risk management) 4) Duration – how long the relationship will last between parties a. The longer the duration, the greater probability of unforeseeable events occurring b. High uncertainty is linked to demands made on internal control systems to identify these uncertainties and cope with them in a manner that reduces transaction costs Choice of Business Type Concerns for Persons Contemplate Business Ownership - 1. Right to manage 2. Option to avoid personal liability for debts 3. Enjoyment of favorable tax treatment 4. Right to exit business in a reasonably prompt way Sole Proprietor : no paper filed to create business ( Note: trade name must be filed to identify owner – Partnership Act )  Management: Proprietor has sole control over management  Liability : Proprietor is personally liable for all losses of business  Taxes: Net income from business is taxable income to proprietor (flow-through taxation)  Exit: proprietor must sell or wind down business  Advantages : (1) Easy of creation, (2) Ease of dissolution, (3) Flow-through taxation  Disadvantages : (1) Unlimited personal liability, (2) limited financing options Partnership : 2 or more persons as co-owners of business, no documents filed to create partnership  Management: Partners have equal rights to management  Liability : Partners are personally liable for debts of firm  Taxes: Taxation is on a flow-through basis (income of partnership is taxed as income of partners)  Exit: Partners can exit business – may be complicated  Partners can contractually arrange internal affairs of their associations, with exceptions (ex. liability to third parties, core fiduciary duties between partners, etc.)  Governed by Partnership Act Limited Partnership : generally same as a partnership except –  There is 1 General Partner - has (1) control of management, (2) same liability as partners in partnership  At least 1 Limited Partner – has (1) no control of management, (2) liability to extent of investment Limited Liability Partnership (LLP ): same as a general partnership, except - 1) Structure of LLP protects partners from personal liability of other partners 2) Must file documents to create this partnership Corporation : separate entity with divisible ownership, assets are separate from shareholders  Management: centralized control, separation of ownership and control  Liability : limited liability of shareholders  Duration: Indefinite  Exit: Transferable and tradeable shares and debt obligations Business Trust : primarily used for asset securitization ventures, assets (ex. mortgages) are pooled together, ownership interest is sold like shares to investor  Management : Trustees manage business, not investors  Liability : Beneficial owners/investors are not exposed to liability unless they exercise control  Taxation : Used to be flow-through, but Income Tax Act 2007 eliminated tax benefits of an income trust  Exit : Sell shares in trust – easy Joint Venture: business arrangement, two or more parties pool resources for accomplishing a specific task Franchise: for franchisor it is a safe alternative to “chain stores” to distribute good – avoid investment + liability of chain PART II - AGENCY

RELATIONSHIP OF PRINCIPAL AND AGENCY Principal = one for whom action is to be taken Agent = acting party, able to bind principal w/in scope of agency relationship, person in whom trust is placed ( Watson ) Empowered to create risk of liability between principal and third parties ( Swift ) Defining Agency Agency Relationship : arises when one gives another power to affect their legal relationships ( Rockland )  Most agency relationships arise from express contract between agent and principal ( Swift )  The test for finding agency requires evidence of the necessary conduct ( Fourney ) Three Elements of Agency: ( Amand, Royal Securities Ltd ): when principal gives authority for another to act on their behalf, and the agent consents, a relationship of agency is created ( Swift , Amand ) 1. Principal’s control of agent’s action – agent acting on behalf of another a. Key consideration is determination of level of control which principal exerted over agent ( Amand ) b. Principal’s control over agent may be manifested in the authority given by the principal to agent ( Amand ) c. No universal test to determine whether person is agent or independent contract – central question is whether person engaged to perform services is doing so as person in business of his own accord  level of control employer has over worker’s activities will always be a factors ( Sagaz ) d. Courts have a problem establishing control – sometimes consider equity of establishing agency as factor as well  this has added ambiguity and confusion as to precedent ( see Mr. Sub ) 2. Consent of both agent and principal , agent agrees to act on behalf of another, principal consents to agent acting a. Consent can be implied by actions of parties ( Swift, Amand ) b. Can be verbal, written, head not, failure to object to actions repeatedly taken and previously authorized ( Swift ) c. Both consent and acting on behalf of another are established by agreement between parties ( Swift ) 3. Authority for agent to affect principal’s legal position a. Essential quality of agency is the ability to affect principal’s legal position ( Merchant Law ) b. Authority may be implied ( Swift ): implied authority is the authority to perform subordinate acts necessary or ordinarily incident to exercise of express authority ( Auer ) i. Implied authority can be inferred from course of dealings between principal + agent ( Amand ) ii. Implication is made on basis that principal consented to agent’s authority ( Swift ) – where there is no consent, no implication of authority can be made iii. Examine conduct of parties to determine if there was an implied intention to create agency ( Amand ) iv. W/o clear authority, reluctant to imply unless principal consented for agent to act ( Swift ) c. Agency can be apparent ( Swift ): impression of authority that principal has created, arises where there is representation by principal to a third party and reliance by third party on representation ( Auer ) Obligations of Agency Responsibilities of an Agent – Roger Estate, Groom, Watson  Obey all reasonable directions of the principal – no duty to perform illegal, unethical, or unreasonable acts  To not act in a manner that makes continued friendly relations with the principal impossible  “Agent is obliged to keep principal’s property and money separate from his own, keep proper accounts, and be ready to produce them on demand to the principal” ( Roger Estate ) o Obligations to account is not per se one of the fiduciary duties of an agent  Agency is one of trust – must not let personal interest conflict w/ obligations owed to principal ( Roger Estate ) Fiduciary Duties – Duty of Care : act w/ care, competence, diligence of agent in similar circumstances ( Watson )  Whether requisite degree of care is exercised is a question of fact ( Watson ) o Where agent purports to have higher level of skill, agent is held to this level ( Professor Stewart, Watson )  Promise to act as agent is a promise to make reasonable effect to accomplish directed result ( Groom ) o Qualification of an agent’s responsibility/liability  Damages is the loss sustained by the principal from the breach of agent’s duty of care ( Watson ) Fiduciary Duties – Duty of Loyalty : keep principal’s interests foremost in mind when acting as agent ( Watson )  Bound to make full, fair, prompt disclosure of all facts that threaten principal’s interests ( Watson ) o Burden of proving full disclosure lies w/ agent ( Watson )  If an agent has more trust and greater discretion, a court is more demanding of duty of loyalty ( Stewart, Watson )  When an agent breaches their duty of loyalty, they are accountable for (1) profits resulting from breach, (2) losses resulting from breach ( Watson ) Roger Estate v Leung : Roger died intestate, son had power of attorney, estate trustees applied for son to account for actions taken under power of attorney. What are the duties for accounting? What are the duties of an agent?  Power of attorney is a contract of agency – owe fiduciary duties, must account and produce on demand Groom v MacFarlane : MacFarlane had opportunity to get TVs for good deal, did not know supplier, did not have access to TVs, they were not received after 3 plaintiffs gave MacFarlane a deposit. Was MacFarlane an agent?  Whether acting as agent or seller is question of fact as to whether transaction involves seller procuring goods for buyer as agent, or whether seller undertakes to obtain goods and resell them

 Employer does not need to be at fault for vicarious liability to operate Two Requirements for Vicarious Liability: 1. Relationship between tortfeasor and defendant gives rise to liability a. Key factor is traditionally the degree of control exercised by one party over other b. Also “organization test”  whether employee is a cog in defendant’s organization c. When is there a finding of vicarious liability? i. Employer-employee = yes  if employee is w/in scope of employment ii. Principal- agent = yes  if agent is w/in scope of authority iii. Employer – independent contractor = no (unless contractor is also agent w/in scope of agency) 2. Relationship is connected to commission of tort a. Tort must be committed w/in scope of employment ( Joel v Morison ) i. When employee makes minor departure = detour  employer is liable for actions ii. When employee makes major departure = frolic  employer relieved of liability, not w/in employment b. Act must be committed by the “authority of master”, not liable if employee was on frolic of his own ( Joel ) c. Salmond Test ( Bazley, Jacobi, Lister ): Wrongful act is w/in course of employment if (a) wrongful act is authorized by master, or (b) wrongful and unauthorized mode of doing act authorized by master. Justifications for Vicarious Liability :  Employer initiates the activity and profits from work of employee which caused harm  Employer controls employees – in position to minimize exposure to liability  Employers can absorb cost of employee liability – can add cost to sale of products/services  Employers have deep pockets – making them liable ensures that innocent third parties are compensated for harm Procedural Consequences of Vicarious Liability  Liability of principal and agent is joint and severable with: (1) Employee directly liable, (2) Employer vicariously liable  plaintiff can choose whom to sue, or can sue both Heims v Hanke : defendant washed car on street, nephew helped as unpaid volunteer + spilled water on sidewalk which froze, pedestrian slipped + fell. Nephew spilled water + sat it formed ice + did not rectify it, nephew found to be acting as an agent and uncle held liable as principal. Fiocco v Carver : Agent took goods to location specific by principal, on way back stopped to see mother, took truck around with boys loaded in it for a drive, stopped at pool room and then returned. When he started truck, boy’s foot got caught in wheel and was injured. This was a frolic not w/in scope of employment, but in a manner of equity when the car started back up this was in the scope of employment and the injury was done while agent was acting for principal. Termination of Agency Termination of Agency : may be dissolved by agreement between agent and principal: (1) by unilateral action of either party; (2) by death, insanity or bankruptcy of either party. Compensation may be a requirement of termination.  McMann v Kingston : authority given by principal to agent, unless duration is specifically fixed or agreed upon, it is generally revocable at pleasure of principal subject to the agent’s rights of renumeration for work fairly bestowed or made by him under the authority up to its revocation.  Marby v Avrecan : Factors relevant to determination of length of notice include: o (1) Length and type of relationship between parties, (2) Extent of sales force employed by party whose distributorship was terminated, (3) importance of exclusive distributorship to party terminated, (4) acquisition of inventory, (5) time needed by terminated party to acquire replacement and re-establish viable business Termination of Agency and Apparent Authority : Apparent authority impacts the termination process of agency – principal must notify third parties who are aware of agency relationship that it has been terminated. Otherwise, prior manifestation by principal may still create liability for principal. PART III-PARTNERSHIPS Partnership Formation

Main Source of Law is Partnership Act: Following the Partnership Act results in lowest transaction cost for forming a business, BUT it is very general  establishing a partnership agreement that modifies the statute can be more efficient Partnership : relationship between persons carrying on business in common with view to profit ( s 1(g) Partnership Act )  Persons who have entered into partnership are collectively a “firm” ( s 2 PA )  Relationships between members of company/associate who constitute a corporation is not a partnership ( s 3 PA ) Partnership Property : property/rights + interests in property brought into partnership stock, or acquired, whether by purchase or otherwise, on account of firm, or for purposes of and in course of partnership business ( s 1(h) PA ) Partnership Formation Creating a Partnership: can be formed if there are 2+ persons associated as co-owners of business  No documents to be written/filled  lack of formality is fundamental characteristic of partnership Legal Nature of Partnership : a partnership is not a separate legal entity from its partners ( Stewart )  Consequences – (1) each person is liable to full extent of their personal assets for debts and other liability of partnership, (2) Continued existence of partnership depends on continuing participation of partners Determining Existence of Partnership ( s 4 PA ): consider following when determining whether partnership exists – (a) Joint tenancy, tenancy in common, joint property, common property, part ownership does not of itself create partnerships as to anything held/owned (co-ownership does not mean partnership is formed) (b) Sharing of gross returns does not of itself create partnership (c) Receipt by person of share of profits of business is proof that person is a partner in business, but receipt of share or of payment contingent on/varying with profits of business does not of itself make person receiving share/payment a partner in business These are indicia of a business, but just because this occurs is not sufficient to establish partnership Right of Lender and Seller of Goodwill ( s 5 PA ): when person to whom money is advanced by way of loan on contract, or buyer of goodwill in consideration of a share of profits of business (a) makes assignment for benefit of that person’s creditors, (b) enters into arrangement to pay that person’s creditors less than 100 cents on the dollar, or (c) becomes bankrupt or dies in insolvent circumstances, the lender is not entitled to recover anything, and the seller of the good will is not entitled to recover anything, until the claims of other creditors have been satisfied. Establishing whether a Partnership Exists Fact dependent analysis to find partnership  inquire into whether objective, documentary evidence, and surrounding facts support a subjective intention to carry on business in common w/ view to profit . ( Continental Bank, Backman ) Essential Ingredients: (1) Carrying on business, (2) in common, (3) w/ view to profit ( s.1(g) PA, Continental Bank ) Carrying on Business : whether parties have done enough to justify conclusion they commenced business they agreed to carry on, agreement to carry on business at a future time is not sufficient ( Stewart )  Evidence includes: getting inventory, renting space, creating business plan, obtaining financing  acting  Business does not have to be opened to be deemed carrying on a business ( Khan )  Do not need to carry on business for long period of time ( Backman )  Can be formed for single transaction if parties do not create what amounts to an “empty shell” ( Backman )  Carrying on business can mean different things depending on context ( Backman ) o (a) occupation of time, attention, labor, (2) incurring liabilities, and (3) purpose of profit  An intent of several individuals to acquire, hold, and sell a building for profit does not, without other indicia, constitute “carrying on business” ( AE Lepage, s. 4 PA ) In Common : suggests that partners carrying on business together based on agreement ( Backman ) (written, oral, implied)  Typically exists where partied entered into partnership agreement setting out rights/obligations ( Backman )  Whether agreement exists is determined objectively ( Backman ) – o Persons may be partners without their knowledge, and even contrary to express intention, so long as court decides that circumstance show existence of an agreement ( Backman )  Evidence consistent w/ intent to carry on business in common includes ( Continental Bank, Backman ) o (1) contribution of skill, knowledge, or assets to common undertaking; (2) joint property interest in subject- matter of adventure; (3) sharing of profits + losses; (4) filing income tax returns as partnership; (5) financial statements; (6) joint bank accounts; (7) correspondence w/ third parties  Evidence not consistent w/ intent to carry on business in common includes ( AE Lepage ) o (1) Intent of parties to maintain rights as co-owners of property; (2) parties keep respective beneficial interests in property separate for income tax purposes With a View to Profit : only need a view to profit – need not be profitable, must be more than mere window dressing, undertaking cannot be for carrying out charitable, social or cultural purposes  If reason for joint venture partnership is to create tax loss – no view to profit – not a partnership ( Backman ) o Tax motivation does not derogate from validation of transactions for tax purposes or an otherwise valid partnership where essential ingredients are otherwise present  Backman v Queen : Group of individuals purchased apartment building solely to generate loss for taxes. o No partnership – no view to profit, purpose was for generating loss

 S 34 Account by Partner Competing w/ Firm : If partner, w/o consent of all other parties, carries on business of same nature as and competing w/ firm, partner shall account for and pay over to firm all profits made by partner in that business Good Faith and Fair Dealing : “form of conduct permissible in a workday world for those acting at arm’s length are forbidden to those bound by fiduciary ties… held to something stricter than the moral of the marketplace”. “Not honestly alone, but the punctilio of honor the most sensitive… is the standard of behaviour... the level of conduct for fiduciary been kept at a higher level than that trodden by the crowd”. ( Meinhard ) Duty of Loyalty and Disclosure:  Members of a parentship owe a duty of loyalty to each other and must disclose opportunities that arise during course of partnership in order for both to have an equal chance to take advantage of it ( Meinhard ) Meinhard v Salmon – not a general partnership but a joint venture for a limited object to end at a fixed time, near the end of lease the managing co-adventurer (Salmon) takes a new opportunity associated w/ property w/o informing other co- adventurer (Meinhard).  Joint adventurers, like co-partners, owe to one another, while the enterprise continue, the duty of finest loyalty  Partnership relationship could have been renewed w/ same terms to continue relationship  because this was an option, Salmon had a duty of disclosure to inform Meinhard of the new opportunity  When partnership ceases to exist at end of activity for which partnership began, fiduciary duty no longer applies Relationships between partners and third parties in general partnerships s.7 Power of Partner to Bind the Firm : Acts of partner, in carrying on in usual way business of kind carried on by firm, bind the firm and the partners, unless: (a) The partner has no authority to act for firm in particular matter  no actual authority (b) Person the partner deals w/ knows partner has no authority/knows they’re not a partner  defeats apparent authority s.11(2) Liability of Partner : Each partner is jointly liable w/ other partners for debts + obligations of firm incurred s.15 Liability for wrongs, joint and several : except as in s 12, each partner is jointly liable w/ partner’s co-partners, and also severally liable for everything the firm becomes liable for while partner is a partner under s 13 or 14  Joint and Several Liability : claimant can pursue any one party as if they were jointly liable, it becomes responsibility of defendants to sort out their respective proportions of liability + payment. If claimant pursues on defendant, that defendant can pursue other obligors for contribution to their share of liability. s.8(1) Partners bound by acts on behalf of firm : An act/instrument relating to business of firm and done or executed in firm name or in another manner showing intent to bind the firm by a person authorized to do so (partner or not) binds firm  Articulation of apparent authority (Firm makes manifestation holding out to third party that person has authority to act as partner) s.9(1) Using of Credit : If one partner pledges credit of firm for purpose not connected to ordinary course of business, firm is not bound unless partner is authorized by other partner(s) to do such act  Borrowing money for purpose unrelated to business defeats apparent authority s.10 Notice that firm not bound by acts of partner : When partners agree that a restriction is placed on power of a partner to bind firm, an act in contravention of agreement is not binding on firm wrt persons w/ notice of agreement  Defeats apparent authority s.13 Liability of firm for wrongs : The firm is liable to the same extent as a partner for loss or injury caused to a person not being a partner in firm, or for a penalty incurred, when a partner, by wrongful act/omissions, is acting: (a) in ordinary course of business of firm ; or (b) with authority of partner’s co-partners .  Partnership assets are on the line when a partner is liable  If there is liability originating from statute, and statue is narrower than what common law offers, common law action may be pursued as well even though statute articulated something different s.14 Misapplication of money : Firm is liable to make good any loss when: (a) one partner acting w/in scope of apparent authority receives money/property of third person and misapplies it (b) firm in course of business receives money/property of third person which is misapplied by one or more partners while it is in the custody of the firm . No liability arises under s 14 unless there is a fiduciary relationship btwn third party + partnership ( Mendieta ) Mendieta v Nolan and Evison : Partner Evison sold stollen car to customer. Other partner has no knowledge of stolen car. Customer did not know partner was not acting in course of partnership (transaction was on firm property, cheque drawn to firm, bill of sale btwn customer + firm). Evison co-singed cheque to himself + deposited into personal account  was given actual authority to not inform partners they were dealing directly with partner and to co-sign cheques after sale ∴ Evison was acting w/in ordinary course of business of firm . What is the liability of co-partners and partnership ?  Liability under s 14(a) or (b) – does not apply, no fiduciary relationship btwn customer + firm o (a) – could be argued, Evison received money acting w/in scope of authority + misapplied it o (b) – no liability, firm never received money  Liability exists under s 13 – Evison acting w/in ordinary course of business, loss to third party  firm is liable Ordinary Partnerships Agency and Third Parties Liability for Wrongs

 Conclusion : Co-partner and firm are liable to same extent as Evison. Strother v 3564920 Canada Inc Facts: Monarch (M) devised + sells tax shelters to movie corp, Revenue Canada changed rule + removed tax opportunity. M winds down, Darc former M employee devises new opportunity + asks Stroker to be his partner. S works for Davies, already has retainer w/ M which stipulates Davies cannot act for similar tax-shelter scheme. S discloses conflict to Davies but lies about already being involved, Davies tells S not to take interest in D’s opportunity, S resigns. Court holds no damages for breach of contract (retainer) – only potential for liability for breach of fiduciary duties. M claims Davies is responsible for S’s personal profits under s 13 Partnership Act. Issue: Is Davis liable for S’s personal profits under Partnership Act or through vicarious liability through common law. Ratio: Partnership can be found vicariously liable where a partner causes loss or injury to third party in “ordinary course of business”. Analysis : Monarch was client of partnership even though retainer expired, Strother’s work was in direct competition with M. For s.13 – must show that S acted w/ authority of partners or in ordinary course of business of firm  Wrongful act was so connected w ordinary business that it was not possible to disentangle . Davies permitted S to provide legal work despite the fact that they had entered into convent w/ M to not provide such services (could be argued either way as frolic/detour ). The objective of compensating wronged client and deterring faithless fiduciaries are furthered by vicarious liability. Limited Partnerships - Relationship between partners and third parties Limited Partnership : specialized vehicle designed to fulfill needs of investors who want share in profits while limiting their liability for partnership’s losses. In most cases, limited partners are not invested in participating in management, investment is passive. ( Stewart ) Limited Partnership Composition ( Devon, s.51(2) )  Limited partnership has one or more general partner : (i) whose liability for debts + obligations of firm is unlimited; and (ii) who are entitled to manage firm’s affairs  Limited partnership has one or more limited partner : (i) whose liability for debts and obligations is limited in amount; and (ii) are excluded from all management functions.  S 51(2): limited partnerships consist of one or more general partner and one or more limited partner. Function of General Partner : same implied authority to bind partnership and same liability as ordinary partnership ( Devon, s 56 rights of general partner ) Function of Limited Partner: cannot participate in control if they wish to preserve limited status ( Pitman, Devon ) – no power to bind partnership, liability is limited to extent of capital contribution (subject to partnership agreement)  S 55(1) – limited partner may contribute cash/other property to limited partnership, but not services  S 64 Liability to Creditors - limited partner does not become liable unless take part in control of business  Defining feature of limited partnership is circumscribed role limited partners may play in business ( Devon )  Limited partners may not participate in control of partnership if they wish to preserve limited status ( Devon )  Limited partners have no power to bind partnership ( Devon ) Profits and Limited Partner ( s 59(1) ) – Limited partner has right (a) to share of profits/other compensation by way of income; and (b) to have limited partner’s contribution to limited partnership returned. Liability and Limited Partner ( s 57 ): Limited partner is not liable for obligations of partnership except in respect of amount limited partner contributes  liability is typically limited to extent of capital contribution ( Devon ) Rights and Limited Partner ( s 58 ): Limited partner has same rights as general partner to: (a) inspect and make copies of partnership books; (b) given true and full information of all things affecting limited partnership; (c) obtain dissolution and winding up of limited partnership by court order. Pitman v Flanagan Lumber Co Facts: Ramsay (general partner) unable to borrow money. Pitman (limited partner) secured financing on behalf of firm. Ratio: Indicia for control include: “power or authority to manage, direct, superintend, restrict, regulate, govern, administer or oversee”. Securing one of the things that partnership needs to survive (ex. credit) is a sufficient exercise of control and reliance by third party to convert limited partner to general partner such that limited partner loses the liability shield. Conclusion : Securing credit is a sufficient exercise of control, Pitman lost liability shield of limited partner. Holzman v DeEscamilla Facts : Limited partners could withdraw money from bank account w/o general partner authorization, could take control of business from general partner by refusing to sign checks, required general partner to resign as manager and selected successor, dictated which crops were plants (some of which were against wishes of general partner). Ratio: A limited partner shall not become liable as a general partner unless, in addition to the exercise of the rights and powers as a limited partner, they take part in the control of the business. Indicia of control include: overruling management decisions, dictating hiring/firing of managers, being in control of finances. Conclusion : Limited partners had sufficient exercises of control and were converted to general partner. Termination of Partnership

(b) to have surplus asset applied in payment of what is due to partners respectively after deducting what is due from them as partners to firm. (2) Any partner may on termination of partnership apply to Court to wind up business and affairs of firm. s.48 Distribution of assets on final settlement of accounts : In settling accounts between partners after dissolution - (a) losses, including losses and deficiencies of capital, must be paid (i) first out of profits, (ii) next out of capital, and (iii) last by parties individually in proportion in which they were entitled to share of profits, but a partner is not required to pay any loss arising from liability for which partner is not liable under s.12. (b) assets of firm including sums of money contributed by partners to make up losses or deficiencies of capital shall be applied in following manner and order: (i) in paying debts and liabilities of firm to persons who are not persons in firm, (ii) in paying to each partner ratably what is due from firm to partner for advances as distinguished from capital, (iii) in paying to each partner ratably what is due from firm to partner in respect of capital; (iv) the ultimate residue shall be divided among partners in proportion in which profits are divisible. s.44 partnership prematurely dissolved s.45 Rights when partnership dissolved for fraud or misrepresentation s.48 Retiring or deceased partners Financial Literacy Partner – Accounting : Capital amount of each partner shows equity of partner in business  At formation – consists of capital contribution of partner  As business continues, it adds – (i) undistributed net profits to capital accounts of partners at end of each accounting period (calendar year), and (ii) deducts from capital any withdrawals made during accounting period. Gross Profit = revenue – cost of product sold Operating Profit = Gross Profit – overhead (rent, salary, depreciation, other) Pre-tax income = operating profit – interest Net income = pre-tax income – taxes Capital Structure : important to understanding how business is run and financed, can easily be evaluated by looking through corporate balance sheet. Capital structure refers to relationship between a company’s assets and liabilities, including how assets are funded and amount of debt managed by firm. Assets : things that generate revenue + profit (ex. cash, inventory, equipment) Liabilities: Debts, accounts payable Owner’s equity = assets-liabilities PART III - CORPORATIONS CORPORATIONS Corporate Governance Structure Shareholder Ownership (passive investments), Control by Managers  Principal = corporation, Agent = All other parties  fiduciary duty to corp.  Best interest of corporation = best interest of shareholders Debt holders – paid first through priority At bottom is unsecured creditors Remainder to partners  they own residual  Shareholders have limited rights  authority to delegate authority to BoD, which can delegate to managers who have authority to run business  BoD: internal directors – make informed decisions + provide context (management of company, CEOs), external directors – provide fresh insight and an objective perspective (no potential conflicts an insider may face, can bring additional expertise) Essential Elements of Corporation A corporation is a legal fiction characterized by 6 attributes 1. Formal creation as prescribed by law 2. Legal personality 3. Separation of ownership + control (ownership through shares, control based on corporate governance structure) 4. Freely alienable ownership interest (no restrictions no sale of shares after shareholder purchases, generally) 5. Indefinite duration – direction is separated from ownership 6. Limited Liability – business liable as principal, agent can be liable in certain circumstances (codified in ABCA) i) Shareholders are not seen as owners per se and are not liable for liability  instead corporation is liable Corporation Theories Income Statements

Agency Theory : understands corporate governance in terms of agency relationships + costs  Value of corporate law is measured in terms of agency costs (low cost = good, high cost = bad) Concession Theory : right to incorporate is granted by government, w/o government corporation would not exist  Corporation is creature of statute and is subject to privilege of legislative prerogative Transaction Cost : this theory understands corporation as a substitute for market function, corporation internalized market function to reduce transaction costs  Corporations exist because they are more efficient than the market Contractarian Theory : understands corporation as a nexus of contracts, place where a number of contracts meet  Freedom of contract protects corporation rom public interference  Counter argument to concession theory Corporate Legal Personality  Corporate law cordoned off the assets of the firm and the assets of investors in the corporation  Important for a lawyer to be able to understand, work with, and make use of the legal recognition of the corporation as a separate legal entity  There are 2 kinds of legal persons: (1) natural persons, (2) Judicial persons  If business has legal personality, then it has capacity to obtain legal rights and incur legal obligations  S 16 ABCA Capacity of Corporation : (1) A corporation has capacity, and, subject to this act, the rights, powers and privileges of a natural person. (2) A corporation has the capacity to carry on its busines, conduct its affairs, and exercise its powers in any jurisdiction outside Alberta to the extent that the laws of the jurisdiction permit.  The corporation can: (1) contract in its own right, (2) sue and be sued in its own right, (3) own property in its own right, (4) has perpetual existence so that changes in membership of shareholders does not influence company’s legal existence. Limited Liability : Shareholders are not liable for debts of firm, only amount they invest (s46)  note: creditors can use contracts to protect themselves from limited liability – create debt instruments where they feel satisfied w/ risk exposure and it is justified wrt return they will receive  S 46 Shareholder Immunity : (1) The shareholders of a corporation are not, as shareholders, liable for any liability, act, default or corp (except s 38(4) – creditor special circumstances, 146(7) managerial powers are exercised under unanimous shareholder agreement) o (2) Articles may provide that corp has lien on a share registered in name of shareholder or shareholder’s legal representative for debt of that shareholder to corporation, including an amount unpaid in respect of a share issued by the body corporate on the date it was constituted under this Act o (3) A corporation may enforce a lien (referred to in (2)) in accordance with its bylaws. Salomon Redux – The Moralities of Business Can a shareholder be liable for the company? Shareholders can be liable when there is obvious fraud, and company is merely a sham to cover or facilitate wrongdoing. Courts are prepared to imply principal-agent relationship btwn company and its subsidiary in these circumstances. When do BoD take responsibility for their decisions on behalf of company? Directors can be civilly/criminally liable for decisions made outside their formal decision-making authority. If directors are also shareholders, this liability is understood as a way to circumvent stakeholder limited liability. Priority of claims between debenture holders and unsecured creditors . Priority of creditors claims against companies are complex – generally debenture-holders have priority over ordinary trade creditors and shareholders. Is there a certain level of capitalization required? Requirements vary on jurisdiction – a few impose a minimum capitalization to cover foreseeable claims against a company, but many impose no requirements. Can a corporation be guilty of criminal conduct? Criminal liability can be imposed on companies. Do corporations receive the benefits/protection of constitutional rights? Yes, some. Salomon v A Salomon & Co Ltd A corporation has a separate legal personality, its shareholders are not liable for its debts and obligations Facts: Salomon formed corporation following legal requirements, tweaked corporate form to make it closely-held for which he was the de facto only owner, gave secured loan to corp, business went bankrupt, he was entitled to loan in priority of other creditors and was not personally liable to creditors under the corporate form. The Corporate Entity Legal Personality Corporate Personality Incorporation Publicly Traded s 46 exception Liability s 46 rule No liability Closely Held Equitable Exception Liability s 46 Rule No liability

Pre-Incorporation Contracts Statute provides a modification to common law  statute applies for written contract, if it is oral the common law applies Rule at Common Law: When promoters promote company and all parties are aware corporation does not exist, promoters are personally liable for contracts they sign on behalf of non-existent corporation, unless they make some further contractual arrangement such as warranty to cease liability once contract is formed ( Kelner ).  ratification of corporation does not extinguish personal liability of promoters ( Kelner)  Where parties thought the corporation was in existence, when it did not, there is a mutual mistake which nullifies the contract, and promoters are not personally liable ( Smallwood ) S 15 Pre-incorporation contracts : (2) If person enter or purports to enter into written K in name of or on behalf of body corporate before it comes into existence: (a) that person is deemed to warrant to other party to K (i) that body corporate will come into existence w/in reasonable time; and (ii) that K will be adopted w/in reasonable time after body corporate comes into existence, (b) that person is liable to other party to K for damages for breach of that warranty, and (c) measure of damages for breach of warranty are same as if body corporate existed when K was made, person who made contract on behalf of body corporate has no authority to do so and body corporate refused to ratify K. This operates as an agreement to agree that corporation will enter into contract upon incorporation, and if it does not, the parties who signed will be personally liable. If everything occurs correctly, promoters are never parties to contract and cannot be responsible for future performance for that contract after corporation comes into existence and adopts contract  this differs from common law  eliminates lingering liability that common law created for promoters. Note: For an agent to avoid liability, agent needs to disclose that no corporation exists and that the agent will not assume liability for contract. Kelner v Baxter Facts: Promoters for proposed company purchase wine as agents from Kelner, company not formed at time of contract signing, all parties were aware of this. Wine was delivered, company formed and ratified agreement. Wine was consumed but invoice to Kelner was not paid. Company went bankrupt and Kelner sued promoters for payment. Ratio: Defence that an agent is not liable for contracts signed on behalf of principal cannot apply where principal does not exist. Where all parties know corporation does not exist at time of K, assumed that parties contemplated that persons signing would be personally liable  meeting of minds, consider intent of parties at K formation. Conclusion : At time K formed, Kelner assumed that by singing contract and providing wine he would be able to enforce payment even if corporation did not form – all parties knew corporation did not exist so signing parties to contract were actual parties to contract and will be personally liable to Kelner. Black v Smallwood Facts : Black sought to sell land to WSH, Smallwood and Cooper were directors of WSH + signed K as agents of WSH. WSH was not incorporated at K formation, no parties knew of this. Black petitioned court to find S + C personally liable. Conclusion : All parties thought corporation existed – mutual mistake, cannot have had intended to be personally bound. Appointment and Removal of Directors and Officers S 105 Qualifications of Directors (1) The following persons are disqualified from being a director of a corporation: (a) anyone less than 18; (b) anyone who [is of unsound mind]; (c) any person not an individual; (d) person who has status of bankrupt. (5) Person who is elected or appointed a director is not a director unless: (a) person was present at meeting when person was elected or appointed and did not refuse to act as director, or (b) if person was not present : (i) person consented in writing before election or w/in 10 days after, or (ii) person acted as director pursuant to election or appointment. (6) For the purposes of (5), person who is elected/appointed as director and refuses under (5)(a) or fails to consent or act under (5)(b), is deemed not to have been elected/appointed as director. S 106 Election and Appointment of Directors (1) At time of sending articles of incorporation, incorporators shall send to Registrar a notice of directors in prescribed form and Registrar shall file the notice. (2) Each director named in notice referred to in (1) holds office from issue of certificate of incorporation until first meeting of shareholders. No corporation Known to parties in writing s 15 Liability for promoters as guarantor of warranty not in writing Kelner v Baxter Liability for promoters as party to contract Not known to parties Black v Smallwood No liability for promoters

This deals with time between incorporation and first meeting were directors are officially elected. An indicium for piercing corporate veil is failing to meet formal requirements for satisfying the corporate form  ex. is failing to hold a shareholders meeting to elect directors (3) Subject to (9)(a) and s 107, shareholders of corporation shall, by ordinary resolution at first meeting and at each succeeding annual meeting at which an election of directors is required, elect directors to hold office for a term expiring not later than the close of the next annual meeting of shareholders. (4) if articles so provide, directors may, between annual general meetings, appoint one or more additional directors of corporation to serve until next annual general meeting, but number of additional directors shall not exceed 1/3 of number who held office at expiration of last annual meeting. (5) not necessary that all directors selected at a meeting hold office for same term. (6) a director not elected for an expressly stated term ceases to hold office at close of first annual meeting following director’s election. (7) if directors are not elected at a meeting, incumbent directors continue in office until successors are elected (8) if meeting of shareholders fails to elect number of minimum number of directors required by articles by reason of disqualification or death of any candidate, directors elected at that meeting may exercise all powers of directors if number of directors so elected constitutes a quorum. (9) Articles or a unanimous shareholder agreement may provide for election or appointment of a director(s) (a) for terms expiring not later than close of 3rd annual meeting of shareholders following election, and (b) by creditors or employees of corporation or by a class(es) of those creditors or employees. S 107 Cumulative Voting : Allows shareholders to cast multiple votes for more than one director, helps strengthen ability for minority shareholders to elect director, could allow shareholders to cast all votes for single nominee for BoD when company has multiple opening on board. If articles provide for cumulative voting: (a) articles shall require fixed number and not a min/max number of directors (b) each shareholder entitled to vote at an election has right to cast a number of votes equal to number of votes attached to shares held multiplied by number of directors to be elected (c) separate vote of shareholders shall be taken with respect to each candidate nominated for director unless a resolution is passed unanimously permitting 2 or more candidates to be elected by a single resolution (d) if shareholder votes for more than one candidate without specifying distribution of shareholder’s votes among candidates, shareholder is deemed to have distributed votes equally among candidates. (e) if number of candidates nominated exceeds number of positions to be filled, candidates who receive least number of votes will be eliminated. (f) each director ceases to hold office at close of first annual meeting of shareholders following director’s election (g) director may not be removed from office if votes cast against removal would be sufficient to elect director (h) number of directors required by articles may not be decreased if votes cast against motion to decrease would be sufficient to elect a director. S 108 Ceasing to hold office (1) A director of a corporation ceases to hold office when (a) director dies/resigns, (b) director is removed in accordance with s 109, (c) director becomes disqualified under s.105(1) (unsound mind/bankrupt) (2) Resignation becomes effective at time a written resignation is sent to corp, or at time specified in resignation (later) S 109 Removal of directors (1) Subject to s 107(g) ( cumulative voting ) or a unanimous shareholder agreement, the shareholders of a corporation may by ordinary resolution at a special meeting remove any director . (2) if Holders of any class or series of shares of corporation have an exclusive right to elect one or more directors, a director so elected may only be removed by an ordinary resolution at a meeting of shareholders of that class or series. (4) Director elected or appointed under s 106(9) may be removed only by those persons having power to elect or appoint that director.  a class of share may mean a group of shareholders can elect a director other cannot – only these shareholders can remove these directors Other Shareholder Rights Shareholder Rights: Three fundamental rights of holders of common shares – 1. Vote for election of directors and other matters (voting rights) 2. Claim net assets of corporation (ownership/liquidation rights – rationale for dividends) 3. To bring suit (derivative action, appraisal remedy, oppression remedy) Classes of Shares: voting and dividend rights can be placed in different classes of shares  at least one of attributes must attach to each share class. Different share class means different combination of potential rights for each class.  Each share w/in class must have same rights, subject to rules on shares in a series S 26 Shares and Classes of shares (3) If a corporation has only one class of shares, rights of holders of shares are equal in all respects and include the rights (a) to vote at any meeting of shareholders of corporation, (b) to receive any dividend declared by corporation, and (c) to receive remaining property of corporation on dissolution. (4) Articles may provide for more than one class of shares, and if they so provide

or any of shares, and add, change or remove any rights, privileges, restrictions, conditions, including rights to accrued dividends in respect of all or any shares; (f) change series of share of any class or series into different number of shares of same class or series or into different number of shares of other classes or series; (g) divide class of shares into series and fix number of shares in each series and rights of that series; (h) cancel class or series of shares where there are no issued or outstanding shares of that class/series; (i) authorize directors to divide [and fix] a class of unissued shares into series; (j) authorize directors to change rights attached to unissued shares of any series; (k) revoke, diminish or enlarge any authority conferred under clauses (i) and (j); (l) increase/decrease number of directors or min or max number of directors; (m) add, change or remove restrictions on transfer of shares; (m.1) add or remove express statement establishing the unlimited liability of shareholders; (n) add, change, or remove any other provision permitted by this Act to be set out in articles. S 190 Extraordinary sale, lease, or exchange (1) A sale, lease or exchange of all or substantially all the property of a corporation other than in the ordinary course of business of corporation requires the approval of all shareholders in accordance with (2) to (6). (2) A notice of meeting of shareholders complying w s 134 shall be sent in accordance with that section to each shareholder and shall: (a) include copy/summary of agreement of sale, lease, exchange; and (b) state that dissenting shareholder is entitled to be paid fair value of shares in accordance w/ s 191. (3) At meeting referred to in (2), shareholders may authorize and fix or authorize directors to fix any of its terms/conditions. (4) Each share of corporation carries right to vote in respect of sale, lease, or exchange (5) Holders of shares of class or series of shares of corporation are entitled to vote separately as a class or series in respect of sale, lease, or exchange only if that class/series is affected in a manner different from another class/series. (6) Sale, lease, or exchange is adopted when holders of each class or series are entitled to vote on it have approved of sale, lease or exchange by special resolution . (7) Directors of corporation may, if authorized by shareholders approving a proposed sale, lease, or exchange, and subject to rights of third parties, abandon sale without further approval of shareholders. S 183(5) Shareholder approval of amalgamation agreement : an amalgamation agreement is adopted when shareholders of each amalgamating corporation have approved of it by special resolutions . S 211 Dissolution by directors or shareholders in special cases (1) A corporation that has not issued any shares and has no property and no liabilities may be dissolved at any time by resolution of all directors. (2) Corporation that has no property and no liabilities may be dissolved by special resolution of shareholders or, if its has issued more than one class of shares, by special resolutions to holders of each class whether or not they are otherwise entitled to vote. (3) Corporation that has property or liabilities may be dissolved by special resolution of shareholder or, if it has issued more than one class of shares by special resolution of holders of each class whether or not they are otherwise entitled to vote if (a) by special resolution(s) shareholders authorize directors to cause corporation to distribute all property and discharge all liabilities, and (b) corporation has distributed all property and discharged all liabilities before it sends articles of dissolution to Registrar pursuant to (4). (4) Articles of dissolution in prescribed form shall be sent to Registrar (5) On receipt of articles of dissolution, Registrar shall issue a certificate of dissolution in accordance with s 267. (6) Corporation ceases to exist on date shown in certificate of dissolution. Voting  can vote by proxy, generally no voting rights for preferred shares  Ordinary Resolution  all other votes except Special Resolutions are bare majority (50% + 1)  Special Resolution  2/3 majority to pass for (i) fundamental change; (ii) amalgamation; (iii) extraordinary sale, lease or exchange (has additional requirements); and (iv) dissolution Earnings  Common Shares o Right to Dividend o Right to Residual  justification for Shareholder Primacy  Preferred Shares o Guarantee of Fixed Divided  generally, cumulative backed by removal rights o Priority for Residual over Common Shares Corporate Social Responsibility (CSR) CSR is largely non-state regulation that helps company be socially accountable to itself, stakeholders, and public. Good corporate citizenship means decision-making that reduces negative impact that business has on economic, social and environmental aspects of society. S 136(1) Shareholder Proposals : Registered holder of shares entitled to vote at annual meeting of shareholders, or a beneficial owner of shares, may [submit a proposal’ REVIEW OF SHAREHOLDER RIGHTS

 Subsection (5) allows corporation to refuse to include a proposal if: (i) not submitted soon enough (90 days before date of annual meeting); (ii) related to personal claim/grievance; (iii) purpose is primarily for promoting economic, political, racial, religious, social or similar causes; (iv) similar proposed defeated w/in 2 yrs; (v) rights being abused to secure publicity  Subsection (7) requires corporation to provide notice of refusal plus statement of reasons for refusal  Subsection (8) grants proposer right to petition court to restrain meeting and make any further order it thinks fit ESG Investing : in 2020 the net assets in Canadian based environmental, social and governance funds exceeded $22 billion, a 37% increase from 2019 Structuring Corporate Interests Duty of Loyalty and Care : An agent owes to a principal the duty of loyalty and care  For a corporation, who do the directors/officers owe a duty to? S 122(1) : Every director and officer of a corporation in exercising the director’s/officer’s powers and discharging the director’s/officer’s duties shall (a) act honestly and in good faith with a view to the best interest of the corporation ( duty of loyalty ) ** Key to constructing corporate interests  what is the best interest of the corporation? Best interests of corporation = Either stakeholder OR shareholder model (b ) exercise the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances ( duty of care ) Duty of Care of Directors and Officers S 122(4) : In determining whether a particular transaction/course of action is in the best interests of the corporation , a director (if the director is elected or appointed by the holders of a class/series of shares, or by employees/creditors/class of employees/creditors) may give special, but not exclusive, consideration to the interests of those who elected/appointed the director . Even if it is a stakeholder model, if you are exposed to a certain stakeholder (can remove you) – may give priority Shareholder Primacy – theory in corporate governance that shareholder interests should be assigned priority over other corporate stakeholders  Rationale : shareholders are owners of residual , have vested interest in ensuring resources are used to their maximum effect which should in turn maximize benefit to society  Shareholders are in the riskiest position – interests should be the same as corporation – only get the residual  Reduce chances of managerial opportunism  Berle : corporate irresponsibility requires legal control, empowering the shareholders is how to do it o Ethical leadership comes from investors  supports shareholder primacy Stakeholder Theory – argues that corporate interest is broader than that of profit seekers, there is a duty for directors to consider all stakeholders and their relation to corporate body when making decisions ( including management, shareholders customers, supplies, creditors, community, government, public, environment, employees, etc .)  Management are invested in long term wellbeing, suppliers have relations w/ corporate body, creditors, community etc.  should all be considered  Potential issue: stakeholders have conflicting interests, giving directors tremendous discretion because they could always rationalize their decision making o Could increase managerial opportunism, allowing managers to balance competing interests may provide management too much discretion  Dodd : greater gap between ownership and control allowing corporate managers to become stewards for society o Ethical leadership comes from management  supports stakeholder theory o Concerns with shareholder greed “Best interests of Corporation”  Shareholder o Corporate Social Responsibility  Ethical Investing – for ex. ESG Investing o Corporate Irresponsibility  Greedy Profiteering – for ex. short term share value maximization  Stakeholder o Corporate Social Responsibility  Stewardship of Society – for ex. enlightened corporate leadership o Corporate Irresponsibility  Managerial Opportunism – for ex. using resources irresponsibly for manager’s own benefit Statutory Direction for Determining Best Interests of Corporation Best Interests & Shareholder Primacy Best Interests & Stakeholder Theory REVIEW OF SHAREHOLDER VS STAKEHOLDER DEBATE

 Agent has fiduciary duty to their principal – no one with such duties shall be allowed to enter into engagement with which they have person interest conflicting w/ fiduciary duty  Inability to contract depends on fiduciary character of contracting parties  Bound to make best bargain for corporation, a personal interest would lead in opposite direction  Rule has relaxed due to: (1) start-ups need to turn to directors for financing/specific assets; (2) independent directors may sit on several different boards creating multiple conflicts o Strict rule may hinder independent board members or limit a corporation’s capacity to do business S 120 Safe Harbour Provision – statutory amendment for self-dealing transaction rule  Allows for self-dealing transactions if it benefits corporation, and procedural safeguards are observed  If a director has an interest in transaction, must follow statutory procedure in s 120 S 120 – Safe Harbour Provision  not a shield for obvious self-dealing ( UPM ) (1) A director or officer of a corporation who (a) is a party to a material contract or transaction (or proposed material contract/transaction) w/ corporation, or (b) is a director or an officer of or has a material interest in any person who is a party to a material contract or transaction (or proposed material contract/transaction) with the corporation shall disclose in writing to the corporation or request to have entered in the minutes of meetings of directors the nature and extent of the director’s or officer’s interest .  What is material?  Disclosure is required whenever interests of director/officer might be relevant to corporation’s decision ( Zysko )  Outliers: o McAteer v Devoncraft : Director was trustee of trust, entered into K w/ corporation, found to have material interest even though director did not have beneficial interest in trust  Trustee had fiduciary duty to act in best interests of beneficiary and as a director of corporation a duty to act in best interests of corporation  split duty of loyalty  Director/trustee did not have any material interest in contract themselves, but there was a conflicting obligation between the trust and corporation which became material to the transaction and required disclosure to avoid breach of fiduciary duty o Exide Canada Inc v Hilts : close personal relationship between director and person, who was negotiating a contract w/ corporation, was a material interest which required disclosure  Corporation would question whether best deal is obtained, a spectrum of doubt is created where it is not clear whether fiduciary is acting w/ best interests of corporation  “Disclosure of a director’s interest is but the first step. Disclosure does not relieve director of duty of loyalty throughout the germane dealings. Directors must always place interests of corporation ahead of their own” ( UPM )  Test for Degree of Disclosure – “No precise formula… amount of detail requires must depend in each case upon the nature of contract.. and context to which it arises.” Declaration must make directors “fully informed of the real state of things”. ( UPM )  “No answer to the duty to disclose to say that directors could have discovered this for themselves. Duty to disclose an absolute one” ( UPM ) (2) … disclosure required by subsection (1) shall be made, in case of a director (a) at meeting which proposed contract/transaction first considered, (b) if director was not interested in proposed contract/transaction at time of meeting, at first meeting after director becomes interested (c) if director becomes interested after contract/transaction made, at first meeting after becoming interested, or (d) if person interested in contact/transaction later becomes director , at first meeting after they become director. (4) disclosure required by (1) shall be made, in case of officer who is not director, [in same manner as director]. (5) If material contract… is one that, in the ordinary course of corporation’s business, would not require approval by directors or shareholders , director/officer shall disclose in writing to corporation, or request to have entered in minutes of meetings of directors, the nature and extent of director’s/officer’s interest forthwith after the director/officer becomes aware of contract/transaction (or proposed). (6) Director referred to in sub(1) shall not vote on any resolution to approve contract /transaction… (8) If a material contract… is made in which director/officer has material interest (a) contract/transaction is neither void nor voidable by reason only of that relationship, or by reason only that director with interest in contract/transaction is present at/counted to determine presence of quorum at meeting of directors that authorized contract/transaction, and (b) the [person] to whom profit accrues as a result of [transaction] is not liable to account to corporation for that person by reason only of holding office as director/officer , i. if [person] disclosed interest, and ii. contract was approved by directors or shareholder, and iii. it was reasonable and fair to corporation at time it was approved. (8.1) Even if conditions of (8) are not met, a [person] is not liable for transaction for which disclosure is required, and transaction is not void or voidable if, Statutory Disclosure Procedure

(a) transaction was approved by special resolution at meeting of shareholders, and (b) disclosure of interest made before transaction was approved, and (c) transaction was reasonable and fair to corporation when it was approved/confirmed. (9) If director/officer of corporation fails to comply, Court may, on application of corporation or its shareholders, set aside material contract/transaction on any terms that it thinks fit, or require director or officer to account to corporation for profit/gain realized on it, or both. (10) This section is subject to any unanimous shareholder agreement. Duty of Care – s 122(1)(b) Defence to breach of duty of care is the Business Judgement Rule S 122(1)(b) Duty of Care : Every director and officer of a corporation in exercising the director’s or officer’s powers and discharging the director’s and officer’s duties shall…. exercise the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances.  Two ways to breach duty of care – (1) Nonfeasance = no decision; (2) Misfeasance = bad decision Standard of Care :  Must be informed about business and affairs of corporation and in a position to make an informed decision o Monitor corporate policies, attend meetings, etc.  Must have at least a rudimentary understanding of business  Must diligently apply whatever skills/experience they possess  standard of care is subjective  Allowed to rely on expert advice o Ask what is relevant in context of industry, use report received, and based upon understanding of report w/in context of director’s subjective understanding of business make a recommendation to full board and act upon that decision o As long as there are no red flags in the report – allowed to rely upon it o Filtering through a sub-committee provides additional safeguard that the procedural due diligence of receiving and deciding was sufficiently informed Causation : Plaintiff has burden to show (1) defendant failed to meet SoC; and (2) failure resulted in harm  Difficult for nonfeasance – often not clear that if director/officer had paid attention, loss would not have occurred Duty of Care Test : “duty of care requires that where director make decision likely to affect stakeholder welfare, decision must be made on an informed and reasoned basis”. Directors “must make a decision and exercise their judgement in an informed and independent fashion, after a reasonable analysis of situation and acting on a rational basis with reasonable grounds for believing that their actions will promote and maximize stakeholder value” ( UPM )  Advisor Defence: a “board is entitled, indeed encouraged, to retain advisors, but this does not relieve directors of their obligation to exercise reasonable diligence” ( UPM )  Committee Defence: employing a committee does “not relieve directors of their independent obligation to make an informed decision on a reasonable basis” ( UPM ) Business Judgement Rule : court will focus on process, not substance of decision, when assessing breach of duty of care  Decision just needs to be in pursuit of profit, without having consideration to whether it will actually make profit  If director exhibited due diligence and contemplated all decisions possible, the decision will stand, and it is not a breach of duty of care o Protects business judgement – court generally refuses to look past decision to substance where general process has been followed  want to avoid hindsight bias  Does not protect total failure to identify problem and a failure to make a decision (nonfeasance not covered by business judgement rule)  US Rule – Shlensky v Wrigley : “do not mean to say that we have decided that the decision of directors was a correct one. That is beyond our jurisdiction and ability… merely saying that the decision is properly before directors and the motives alleged in the amendment complaint showed no fraud, illegality, or conflict of interest in their making of that decision”  Canada Rule – in 2004, it was adopted by Peoples: “ Because of risk of hindsight bias, Canadian courts have developed a rule of deference to business decisions called the ‘ business judgement rule ’…”  “Business judgement rule protects Boards and directors from those that might second-guess their decisions. The court looks to see that the directors made a reasonable decision, not a perfect decision… recognizing the autonomy and integrity of a corporation and the expertise of its directors… in the advantageous position of investigating and considering firsthand the circumstances that come before it and… to understand the affairs of the corporation and to guide it’s operation” ( UPM ) o “Directors are only protected to the extent that their action actually evidence their business judgement… principle of deference presupposes that directors are scrupulous in their deliberations and demonstrate diligence…” ( UPM ) o “Courts are entitled to consider content of their decision and extent of the information on which it was based and to measure this against the facts as they existed at the time the impugned decision was made” ( UPM )