Chapter 10: Agency

- Agency: service performed by an agent on behalf of the principal

- Agent: a person authorized to represent or act on behalf of a principal in dealings
with third parties
- Principal: the person who authorizes an agent to represent them
- Service can be performed as employees, independent agents, or gratuitously
- Specialized agencies fill a service function
- Ex. real estate, law, accounting firms
- Not all employees are agents
- When acting as agents of employers, duties and obligations go beyond the
employment relationship → separate function or obligations
- Boards and commissions govern agencies → provide licenses, training, insurance, and
other services
- Hear complaints and provide discipline
- Agency relationship can be created by the following
- Express or implied contract
- Agency agreement (an agreement creating an agency relationship
between principal and agent)
- Covers authority of agent, duties to be performed, and nature of
payment to be received
- No formal requirement → good to put it in writing/may be required
under Bills of Exchange Act
- Agency agreement must be in writing for more than one year in
provinces in the Statute of Frauds

-
- Power of attorney (an agency agreement in writing and under seal)
- All elements of a contract must be present → consensus, consideration,
legality, intention to be bound, and capacity on the part of both parties
- Lack of an element can make it contract void but not affect
the binding aspect of contract
- Agents acting gratuitously can be binding on the principal if
agents are authorized to act on their behalf
- Agents who are minors may not be bound by an
agreement with the principal, but principal will be bound
- It is voidable
- Elements of contract must be present
- Actual authority: authority given to an agent expressly or by implication
- Expressly or implied
- Express authority: the authority of the agent as actually
stated by the principal
- Written agency agreement should eliminate need
for implied authority
 - Implied authority: when the authority of the agent is implied
from surrounding circumstances, such as the position or
title given (by the principal) to the agent
- Applies to people who are hired as a purchasing
agent
- If principal states agent does not have certain
powers, no such authority is implied
- Other types of legal relationships
- Agents represent clients when actions have legal ramifications but not
entering a contract
- Ex. Real estate agents represent the vendor of a property → job to bring vendor
and purchaser together
- Estoppel
- Apparent authority (ex. Estoppel): authority as suggested to a third party
by the conduct of a principal; may exist even when there is no actual
authority
- Reasonable person test
- Ex. a car dealership can appoint someone as the manager, it
would be reasonable to assume that the manager has the
authority to sell cars and make trade-ins → if the car dealership
says to the manager to not make trade-ins over 2000 without
approval and manager does a trade-in, the car dealership is still
bound by the deal
- Principal can also be bound by actions if actions were already done
previously
- Ex. a car dealership that tells a manager before that they can
make trade-ins but now they have to stop, if the manager
continues to make trade-ins, it would be binding on the car
dealership
- If action is unauthorized and misleading indication of authority
comes from agent, third party will have no claim on principal
- Reasonable person test
- Question to determine: “was the agent acting within the actual
authority given by the principal?”
- Yes → there is a contract
- No → “did the principal do anything to lead the third party to
believe that the agent had the authority to act?”
- Yes → there is contract between principal and third
party
- No → no contract and third party can look to agent for
redress
- Estoppel: an equitable remedy that stops a party from trying to establish a
position or deny something that, if allowed, would create an injustice
 - Ex. you cannot be like if a principal says to a third party that
“George has authority to act for me” and then later be able to deny
it and escape liability for george’s actions
- Is the principal bound?
- Not the same as promissory estoppel
- Ratification: when the majority agrees with the terms of a collective bargain;
when a principal confirms a contract entered into by their agent
- Ex. even I didn’t tell you to buy a car, if I like it, I can ratify the contract
into binding
- Must meet the following qualifications
- Time limit
- Reasonable time limit
- Specific principal
- Must have indicated before hand a principal
- Capacity
- Principal must be fully capable into entering
- Performability
- Parties must still be able to perform the object of contract
at time of ratification
- Can be a two-edged sword and work against principal
- Agency of necessity: consent to act as an agent that is implied when there is an
urgent reason
- A bit archaic – used more often pre-instantaneous communication
- Gratuitously
- Granting of Authority (the right or power to act or make a decision)
- The most common and ideal way: agency of agreements
- The rights and Responsibilities of the Parties
- Agent’s duties
- Contractual
- Violation of the contract even under apparent authority can be
sued for breach
- Failure to fulfill obligations also is breach → unless illegal or against
public policy
- Duty of care
- Must have skills, expertise and exercise skills/expertise in a
reasonable manner
- Ex. if khan hires gamboa to build an apartment building and
gamboa fails to discover that land is not zoned for use, gamboa
will have to compensate khan
- discretion/specific instructions
- Act in the benefit of the principal
- Agent cannot go against specific instructions
- Delegation, accounting, fiduciary duty
 - Agent cannot delegate responsibility unless there is consent (both
expressed or implied works)
- Delegation: entrusting someone else to act in one’s place;
an agent normally cannot delegate their responsibilities to
someone else
- Agent who delegates must see terms of agency agreement
fulfilled
- Utmost good faith
- Fiduciary duty: agent is to act only to the best interest of principal
- If anything is bought or acquired on behalf of principal, everything
must be paid to principal
- Agent must keep record of agency transactions
- Owe principal full disclosure: the obligation to reveal all relevant
details of a transaction
- Agent cannot act for both principal and third party
- Cannot accept payment from third party → principal is entitled
to an account and the receipt of all such funds
- Only can happen if there is full disclosure and
permission
- Conflict-of-interest
- Some provincial govs banned “double-ending” or
“dual agency” practices (real estate agent
represents both buyer and seller)
- Real estate → agent acts for seller
- Agent obtains property for the purchaser without
disclosing property is owned by agent or when they buy
the property themselves from the seller → breach of
fiduciary duty
- Agents must not operate businesses in competition with principal
- Agents cannot represent another principal selling a similar product
without full disclosure
- Agents cannot hide profits or commissions
- Senior employees → fiduciary duty will continue after termination
- Ordinary employees → duty owed ends right after termination
- Employment contracts and contract with independent
agents contain terms to restrict individuals from working in
similar businesses
- Other examples
- Keep in strict confidence any communications that come
through the agency function and communicate that
information to the principal
- Act in the best interests of the principal, even if the agent
may lose some personal benefit
 - Not take advantage of any personal opportunity that may
come to their knowledge through the agency relationship
- Fiduciary duty owed to indigenous peoples
- Federal gov has fiduciary obligations to first nations
peoples
- Constitution act , 1982 → affirms “exisitng aboriginal and treaty
rights of aboriginal peoples” (includes Indian, Inuit, and Metis
peoples)
- Discrepancies of fiduciary duty
- Federal boards and tribunals, even though they are
appointed by and are agents of the Crown, do not
have a fiduciary duty to “the aboriginal peoples of
Canada.”747
- When a First Nation sues the Crown, the Crown
does not have a fiduciary duty to act in the First
Nation’s interest during the litigation.748
- It remains unclear whether the Crown has fiduciary
duties to fund social services such as health care
and education in First Nations communities
because lower courts have made conflicting
decisions.749
- Principal’s duties
- To honour terms of the contract by which agent was hired
- Payment → obligation to pay reasonable amount implied on basis of effort and
customs and traditions
- If payment only for completion → no implied payment for part
performance
- Principal must reimburse agent’s expenses
- Ambiguous authority
- Courts favour interpretation that gives agent the broadest possible
power unless it's the power to borrow money, then it is the
opposite
- Third party
- If agent has no authority claimed, third party may be able to sue for:
- Warranty of authority
- Tort of deceit
- Negligence
- Agent’s tortious conduct (liability)
- Employer is vicariously liable for the act of an employee that occurs
during course of employment
- What if agent is not an employee
- Vicarious liability limited to employee-employer
 - Even if the relationship involves a person who is essentially an
independent agent, that agent may be functioning as an employee
in a given situation
- So, definition of employee is more important
- Principal may be directly liable (not just vicariously)
- Situations where vicarious liability will apply
- Principal responsible for theft or fraudulent misrepresentation by
an agent
- If principal leads third party to believe agent is an employee
- Undisclosed principal: a principal whose identity is concealed from the
third parties with whom the agent is dealing; the rights and obligations of
the pirates depend on whether the agent makes it clear that they are
representing an undisclosed principal rather than operating on their own
behalf
- Agent has no liability to third party in this case
- If would-be agents act like the principal → third party can sue only them
- If there is ambiguity → third party has choices (choice is binding)
- Some contracts cannot be enforced by an undisclosed principal
- Identity of parties is important
- Apparent authority is claimed
- When contract is made under seal, undisclosed principal cannot
be sued
- To avoid problem of undisclosed principal situations → agents need to
be extremely careful
- Done by writing “pere” immediately before signature of
agent
- Termination of Agency
- Termination of agency occurs on withdrawal of consent of principal
- Notification
- Employer can terminate employee or when a specific time
ends
- Actual authority is terminated → apparent authority may
continue → steps must be taken to inform all potential clients
- Other ways to terminate: death, insanity, bankruptcy, dissolution of
principal corporation, mutual agreement between parties
- Actual authority ceases for agent
- Mental incompetence → apparent authority is unclear, principal must
actively notify third parties
- Mutual agreement → apparent authority continues until the third party is
notified of termination
- Enduring power of attorney: the power to act as the donor’s trustee or
representative following the donor’s lack of capacity
- Attorney can make financial decisions, healthcare decisions, and
other personal decisions after principal loses mental competence
 - Powers of attorney and enduring powers of attorney can be
abused

Chapter 10 continued: Partnerships

- Types of business organizations

-
- Sole proprietorship
- Individual carries on business alone, no separate legal entity, unlimited
personal liability, makes their own decisions
- Sole proprietor and owner are the same. Owner bears all responsibility for
costs, losses, obligations, and liability
- Small business and professionals practicing by themselves
- Sole proprietor can act through agents or employees
- Ex. lawyer or accountant acting as a sole proprietor will usually
employ an administrative assistant
- Must satisfy many federal, provincial and municipal requirements to carry
on business
- Licensing process is used to generate tax revenue or control
certain types of business
- Individual professionals must be members of their respective
organizations in order to ensure proper qualifications and training
- Tradespeople need proper certification
- Must satisfy local zoning bylaws and employment legislation
- Subject to less government regulation than partnerships and
corporations
- Minimal records need to be kept for government agencies
- Not accountable to others and responsible for all important business
decisions
- Unlimited liability: the liability of the sole proprietor or the partners for all
debts incurred by the business to the extent to their personal resources
- Liability is incurred for breached contracts or torts, or when there
is insurmountable debt, burden falls on sole proprietor
- Responsible for any tort committed by employee
- Insurance can offset risk
- Profit from proprietorship must be taxed
 - Professional individuals (doctors, dentists) cannot incorporate their practice in
many jurisdictions → little advantage if they do
- Only practice of professional services cannot be incorporated →
professionals can get advantages of incorporation by establishing
corporations that supply them
- advantages?
- Partnership
- Partners carry on business, unlimited personal liability
- Partnership(s) Act
- A partnership is created when two or more people carry on
business in common with a view toward profits
- Evidence of following will constitute to partnership
- Joint contribution of capital to establish a business
- Intention to share profits or losses
- Joint participation in the management of a business
- Other circumstances that does not establish a partnership
- Owning property in common, even when it is rented out for
profit.
- When a debt is repaid by the creditor taking a share of the
debtor’s profits. For example, Pallas owes Clegg $10,000,
and Clegg agrees to let Pallas pay it back by paying 20
percent of the profits of Pallas’s furniture store every month
until the debt is paid.
- When the payment of an employee is based on a share of
sales or profits, such as commission selling or profit-
sharing schemes.
- When the beneficiary of a deceased partner receives the
deceased partner’s share of the profits.
- When a loan is made in relation to a business and
payment of interest varies with the profit. For example,
Pallas loans Clegg $10,000 to start a furniture business,
and Clegg pays interest on that $10,000 principal by
paying 10 percent of the store’s profits per month.
- When a business is sold and the payment of the goodwill
portion varies with the profitability of the business. For
example, Pallas sells Clegg a furniture business for
$10,000 for the assets and 50 percent of the first year’s
profits for goodwill.
- Sets out rights and obligations for partnerships → can be modified by
partners
- The partners will share profits equally between them.
Similarly, any losses incurred are shared equally between
the partners. This provision is often modified by a
partnership agreement, but outside third parties will not be
 affected by any agreement, as they can recover losses
from any partner who has assets. That partner may then
look to the other partners for reimbursement.
- The partners are entitled to reimbursement for any
expenses they incur in the process of the partnership
business. They are entitled to be reimbursed for any
money other than capital they have advanced to the
partnership before the other partners can claim a share of
the profits. In addition, the partner advancing such funds is
entitled to the payment of interest on any money loaned to
the partnership over and above the capital contribution.
- All partners have the right to take part in management.
This provision is often modified by partnership agreements,
which create different classes of partners such as senior
and junior partners, particularly in large firms.
- A partner is not an employee and is not entitled to wages
or other remuneration for work done, only to a share of the
profits. To provide partners with a steady stream of cash
flow, the firm may pay partners a monthly draw against the
yet-to-be-calculated profits of the partnership. In a BC
case, a partner was also found to be an employee of the
partnership by the Human Rights Tribunal, which also
determined that he had been the victim of age
discrimination. The BC Supreme Court agreed, but this
decision was overturned by the Court of Appeal, which
found that a partner in a partnership could not be an
employee of that partnership. The case was further
appealed to the Supreme Court of Canada,789 which
upheld the Court of Appeal decision but noted that it was
not saying that a partner could never be an employee for
the purposes of the Human Rights Code. In this case the
equity partner had such a degree of control and input into
management decisions that finding him to be an employee
would be inconsistent with him being a partner. In most
cases, a partner will not be an employee, but the Supreme
Court left the door open to find otherwise when the
arrangement created a relationship of control and
dependency.
- No major changes can be made to the partnership
business without the unanimous agreement of all the
partners. No new partner can be brought into the
partnership, nor can a partner be excluded from the firm,
without the unanimous consent of all the partners.790
However, for the ordinary matters of the firm a simple
 majority vote is sufficient, unless the partnership
agreement states otherwise.
- Partners do not have the right to assign their partnership
status to some other party without the consent of the other
partners. The benefits can be assigned, but the assignee
will not be a partner and will not have the right to interfere
in the management or administration of the partnership
business.791
- The business records of the partnership must be kept at
the partnership office, and all the partners have the right to
inspect them.
- Provisions found in partnership agreement
- Names of the partners and the name of the partnership
- What each partner brings to the partnership, including
specific duties and responsibilities and the capital
contribution of each partner
- Nature of the partnership business and limitations on the
authority of the partners
- How profits and losses are to be shared and any right to
take a draw against profits
- The decision-making structure and a provision for dispute
resolution
- How (and when) changes are to be made to the
agreement, such as retirement, adding a new partner, or
changing the nature of the business, and under what
circumstances the partnership is to be dissolved
- Reference to specific sections of the Partnerships Act
where appropriate
- Fiduciary Duty
- Partners must act in the best interests of their partners
- Profits made for personal benefit without consent must pay
profit and reimburse partnership
- Information obtained must be used to benefit of
partnership
- If partners operate similar business without consent, they
are required to pay any profits to partnership
- Partnership created when two or more people carry on business in
common with a view to towards profit
- Also known as a firm
- When does sharing of income not establish a partnership?
- When will a partnership be presumed?
- Can be created inadvertently
- Profit doesn’t have to be made but must be the object of activity
- Sharing of net proceeds
 - Relationship can have significant consequences for parties if
created in advertently
- Can be created by contract
- Basic contract law applies
- Always good to make it in writing
- Terms of contract not always conclusive of nature of relationship
- Agreement must include the following:
- the duties of each partner
- what type of work or talent each is expected to contribute
- the amount of time and money to be committed to the
business by each partner
- how the profits are to be shared and how the capital is to
be distributed
- any limitations on the powers or authority of each partner
- methods of resolving any disputes between the partners
and how the business is to be managed
- the circumstances in which the partnership will be
dissolved
- Rights of outsiders are unaffected by any agreement between the
partners
- Creation by Estoppel
- Registration
- Failure to register properly can result in the imposition of a fine
- Not a separate legal entity
- Possible to enter into legal relationships
- Partner is an agent
- Liability through agency
- Ex. Assume Akbari and Carlson operated a shoe store in
partnership and Akbari, while visiting their regular supplier
in Toronto, purchased 500 pairs of patent-leather shoes
they were unable to resist for $5,000. That contract would
be binding on Carlson, even if the partnership agreement
specifically set out that neither partner could make any
purchase over $1,000 without the other’s approval.
However, if Akbari bought a new boat during his trip to
Toronto, this purchase would not be binding on his partner
because the purchase could not be said to be made
pursuant to the partnership business of selling shoes.
- Vicarious liability
- Responsible for both careless and intentional conduct of their
partners
- Ex. if Agostino and Paradis were partners selling firewood, and
Agostino negligently dropped a load of wood on a passing
 pedestrian, both Agostino and Paradis would be liable to pay
compensation for the injury
- Responsible for money or property of third parties put in care of
partnership
- Responsible for misdeeds of employees
- Unlimited liability
- Partner’s liability is unlimited, and they are responsible for conduct
of employees AND other partners
- Profits and loss can be allocated based on different
arrangements ex. Senior partner gets 40% of profits while
junior receives 20%
- Any debt taken first form assets of partnership and then out of
partners own assets
- Partnership agreement only affects relationships between partners
- Outside third pirates can sue any partner without needing to
consider liability
- All partners must be included in the lawsuit action to seek
remedy against all partners
- Partners are only jointly liable (under joint liability, all parties must be
sued together; partners may face joint liability for debts of the firm) for
debts and obligations → happens in most provinces
- Severally liable: under several liability, each partner can be sued
separately
- Jointly and severally → comes from wrongful conduct, misuse of money
or property
- Retiring partner remains liable for any wrongs committed or
liability incurred during the partnership period
- Important for partners to notify colleagues and customers
of partnership changes
- Fiduciary Duty owed
- Advantages of Partnership
- Provides considerable protection to the individual partners (cannot
be outvoted and can always inspect all records)
- Less expensive to set up partnership as less formal requirements
(no accounting records)
- Dissolution of a Partnership
- Requires notice by one of the partners
- Implied or explicit
- Need to sell partnership assets and proceeds → overcome by having a
mechanism where if a partner leaves, the partnership doesn’t dissolve
- Death, Bankruptcy,or Insolvency
- Partnerships agreements will be set out that death or insolvency
doesn’t dissolve → partners share will go to heir
- Insurance coverage is taken out to cover
 - Doesn’t happen in BC unless modified
- Other forms of dissolution
- Illegal business
- Expiration of partnership term
- Termination of venture
- Partner become mentally incompetent
- The conduct of one partner is prejudicial to the partnership
relationship, or the partner is otherwise in breach of the
partnership agreement.
- It is clear that the partnership business can be carried on
only at a loss.
- It is just and equitable that the partnership be dissolved
- Effect of dissolution
- Wind up the business
- Liquidate the assets to pay off any obligations to creditors
- Debts may be paid out of profits, then capital if not
sufficient, then partner’s assets
- Assets remaining first pay back to partners for
advances then original capital investment
- Anything left is sharing profits amongst partners
- Distribute any remaining assets and funds to the former
partners
- Notice sent out to customers, individual partners, and
registrar of corporations
- Limited partnerships: a partnership with limited and general partners
- Limited partners: a partner in a limited partnership whose liability
is limited to the amount of their investment
- Allows partners to avoid unlimited liability → only loss can
incur is original investment
- Can lose status of limited partners if they don’t adhere to
all requirements of governing legislation
- Need to file a declaration at appropriate government
registry to form limited partnership
- General partner: a partner in a limited partnership whose liability is
unlimited
- Need to have one general partner
- Limited liability partnerships: a form of partnership in which only the
partner responsible for loss faces unlimited liability
- Must register for LLP
- Common for lawyers and accountants
- Potential liability is limited
- Specific legislation varies from province to province
 -
- Corporation (next class)
- Separate legal entity, limited personal liability
- Non-profit society
- A separate legal entity with different procedures of incorporation and
liabilities of its members from corporations
- Holding corporation
- A corporation that owns shares in other corporations
- Joint venture
- The collaboration of several businesses, usually to complete a major
project
- Can be created through partnership → partnership law will apply
- Does not affect rights of outsiders dealing with joint ventures

Chapter 11: Corporations

- Corporations developed in response to the need to finance large economic projects
- Requires large number of financial participation
- Legal personality separate from people who own shares
- Flexibility for owners and directors
- How do you finance corporations amongst a large group of people who are not involved
with the business? (other than LP?)
- Salomon v Salomon & Co.
- Principal of separate corporate personality/legal entity
- Separate legal entity: the principle that a corporation exists separately
from the people who created it
- Two legal persons: the shareholder and an incorporated
company/corporation

-
- Corporate myth: a corporation is a legal fiction
- Canadian courts routinely uphold separate legal entity principle
- Status can be flimsy → ex. Tax department deem different corporations
to be one person
 - Separate legal entity aspect important for commercial activities
- Acquisition of capital without shareholder involvement
- Purchase or sale of shares without interfering operations
- Corporations have limited liability: liability is restricted to capital
contributed (investment); shareholders are shield from liability for
the corporation’s debts
- Responsible for contracts made on its behalf though
- However, creditors can protect themselves by making
directors or shareholders to sign personal guarantee and
become liable for debt alongside corporation
- The role of agents
- Activities of corporations must be carried out by agents
- May have actual or apparent authority to bind the corporation
- Limited liability of SHs
- (twins pillars of corporate law)
- Corporate veil – when will it be lifted?
- Implications
- Process of incorporation
- Deeds of settlement: contracts used historically for setting up a company
(unofficial)
- British parliament eventually permitted but needed to make legislation to
give these companies formal status
- Corporations, once, formed become a separate legal personality
- Three ways of incorporation depending on jurisdiction:
- Registration (a legislated requirement for incorporating a company in
some jurisdictions in Canada)- NS
- Registering a “memorandum of association” and “articles of
association”
- Memorandum of association: the constitution of a
corporation in a registration jurisdiction
- Name of company
- Authorized share capital
- Objects of the incorporation (list of purposes for
which the company is created)
- Only one affected by objects and
restrictions are those that have specific
notice of them
- Difficult to alter a memorandum of association
- Articles of association: internal regulations setting out the
procedures for governing a corporation in a registration
jurisdiction
- Ex. how shares are issued and transferred,
requirements for meetings of the board of directors
and of shareholders, voting procedures at those
 meetings, regulations covering borrowing, powers
of directors and other officers, requirements dealing
with dividends, regulations concerning company
records, and how notice will be given to
shareholders
- Procedures how to alter articles
- Registar has no discretionary right to refuse
incorporation unless requirements are not complied
with
- Letters patent (a method of incorporating used in some jurisdictions in
Canada whereby the government grants recognition to the company as a
separate legal entity) - QC & PEI
- purpose for which the company is formed, the name to be used,
the share structure, any restrictions on the transferability of
shares, and the rights and obligations of the parties
- Filing Articles of incorporation (a method of incorporating based on a US
approach and used in some jurisdictions in Canada) - ON et al
- Granted certification of incorporation after paying fee (contains the
same info as the above incorporation methods)

-
- Other incorporated bodies
- Public institutions
- Non-profit bodies
- Capacity
- All companies have capacity as a natural person (unless they
were created by special acts of legislature or parliament)
- If activity is confined to local area → file under provincial legislation
- Vice versa for federal option
- Depends on cost as well → pay different fees for each province or federally)
- Nature of particular statute involved
- Investors incorporate under the Canada Business Corporations Act if has
more favourable shareholder protection
- Capacity of Corporations after corporations?
- Corporation - Funding
- Director’s ONLY duty is to corporation (and by extension – shareholders)
- Shares: the means of acquiring funds from a large number of sources to run a
corporation give holders an interest in the corporation,
- Gives control to shareholder
- Registration and letters patent jurisdiction set upper limit to number of
shares (pretty high)
- Par-value shares: a share with a stated value at issuance (most shares are now
no par value)
- Becoming less and less popular
- Special rights and Restrictions
- Common shares: shares to which no preferential rights or privileges are
attached
- If no preferred shares, they must include right to vote, receive
dividends, and property of the corporation
- Always have right to vote
- Preferred shares: shares giving the shareholder preference over other
classes of shares; that preference often pertains to the payment of
dividends every year
- Must pay dividends to them before common shareholders,
including dissolvement
- Only get right to vote if failed to pay dividend
- Restriction to transfer or sale of shares in closely held corporations
- Special shares: used for estate planning, right to vote, control of affairs of
the corporation, etc
- Borrowing my
- Borrow from single creditor (bank) → requires mortgage on property
- Issuing bonds or debentures
- Bond: a share interest in the indebtedness of a corporation; often
used synonymously with debenture, though a bond is normally
secured against specific assets, while a debenture is likely not
- Can be sold as premium or discount depending on market
- Make a debt commitment to a trustee → must pay back interest
to the trustee at set intervals
- Debenture: an acknowledgement of debts by a corporation
normally involving more than one creditor; often used
interchangeably with bond, but whereas a bond is typically
secured against a specific asset, a debenture may be unsecured
or secured by floating charge against inventory
- Creates debto-creditor obligation to be repaid (legal obligation)
- Bondholder are creditors → no power unless in default

-
- Closely held and Broadly Held Corporations
 - Closely-held corporation → corporations in which there are relatively
few shareholders; referred to as non-distributing corporations in some
jurisdictions
- Managed by shareholders themselves
- Freer of gov regulations
- Broadly held corporations → corporations that are publicly traded on the
stock market; referred to as distributing corporations in some
jurisdictions
- Liability of SHs?
- Corporations Continued
- Special Rights and Restrictions
- Preferred vs. Common shares
- Borrowing
- Bond vs. debenture
- Bondholder vs/ shareholder
- Closely held vs. Broadly held corp
- Corporate Directors
- Shareholders elect directors
- Participate in all important decisions
- Directors must be of age, of sound mind, no criminal record involving fraud, and
not insolvent
- Directors have fiduciary duty to corporation, and duty to exercise care, diligence,
and skill of reasonable prudent person
- Not to shareholders
- Most circumstances only corporation can sue director
- Special circumstances
- Derivative action/representative action: a lawsuit in which
certain shareholders are given the right to launch a civil
action against the directors on behalf of an injured
corporation
- When are directors personally liable?
- To shareholders?
- Allowed shares to be sold for consideration less than fair
equivalent of money
- Allow transactions that are not permitted by the legislation
- Contravene specific responsibilities as set out in legislation
- To outside interest?
- Fails to pay employees or breach employment standards
- Fails to pay taxes
- Damages to the environment
- Prohibited using insider knowledge: information that affects share pricing that is
not publicly known: directors, officers, and large shareholders, among other,
cannot profit by improperly using confidential knowledge about the corporation
 - Due diligence (environmental defense): doing everything reasonable to avoid a
problem leading to legal liability
- Can be use to escape liability
- CEO runs overall company
- Officers and senior management also owe a fiduciary duty to corporation
- Can be held personally liable
- Promoter: a person who participates in the initial setting up of a corporation of who
assists the corporation in making a public share offering
- Securities commission: a provincial agency that services as a watchdog for the
stock market
- Prevents fraud and insider trading
- Proper prospectus (a public document disclosing relevant information about a
corporation) must be issued to investors
- Owes fiduciary duty to corporation
- Shareholders
- Few obligations (no insider knowledge)
- Only insider if they have enough shares
- Rights of shareholders:
- To see certain records
- the documents of incorporation
- lists of all the shareholders
- lists of transactions or changes in relationship to the shares
- lists of officers, directors, and debenture holders
- minutes of shareholders’ meetings.
- Access to auditor (a party responsible for ensuring that an organization’s
financial statements has been properly prepared;unbiased) and report
- Ensures financial statements are accurate
- Duty to shareholder
- Maintain register of individuals with significant control
- Annual general meeting
- Give shareholders opportunity to vote for the directors of the
corporation
- Advance notice of meeting and appropriate financial statements
- Can put forward proposals
- Proxies
- When shareholders designate another person to vote on their
behalf at an annual general meeting
- Strict rules to not abuse proxies
- dilution of shares
- # of shares = how many votes
- Shareholders have the right not to have their proportion of share
diluted by the sale of more shares to others
- Pre-emptive right: the right of a shareholder to buy new shares in
the same proportion as their current ownership of shares
 - Power is an illusion
- Shareholder Protections
- Protect minority shareholders from abuse
- Sue directors on behalf of corporation when the directors have
done something actionable
- Derivative action
- Oppression action: an action against the directors who have allegedly
offended the rights of creditors or minority shareholders
- Dissent and appraisal remedy
- The right of minority shareholders who are adversely affected by
major changes to indicate their opposition and force the
corporation to buy back their shares at a fair price
- Dividends
- Political gain → if shareholders expect dividend but don’t get paid,
director can get voted out but not sue
- Preferred shareholders can force payment
- Shareholder agreements
- An agreement among the shareholders of a corporation that sets
out the terms of their relationship
- Pros of Incorporation
- Advantages:
- Limited liability
- Shareholders are not liable for debts
- Can be illusion due to creditor’s personal guarantee (a
guarantee of payment for another’s obligation) from major
shareholders or other principals
- Still protects from vicarious liaiblity of employee torts and
suppliers
- Tax advantages
- Shareholders can leave funds in corporation as investment and
defer taxes
- Very complex system so don’t know exactly the advantages
- Succession
- Corporation would go to heirs and become new shareholders
- Shares transferred at will
- How to dissolve a corporation
- Bankruptcy
- Minority shareholders can dissolve by application to the
court of oppression or other inappropriate conduct by other
shareholders
- Shareholders can vote to bring it to an end
- Fail to file the required annual returns
- No duty owed by SH to Corp
 - Ex. environmental groups acquire a few shares to get special
privileges
- Only when majority of shares are acquired shareholder’s activities
are restricted
- Management
- Separate managers from owners
- Can hire professional managers with expertise while shareholders
focus on big picture (shareholders can always change
management)
- Cons of incorporation
- Minority shareholders have little power
- May not be able to sell their shares
- Transferability of shares might be restricted
- Need to get approval of shares
- Expense & regulations
- Hard to change important aspect of the business without going through
incorporating documents → expensive and long procedure
- Most expensive way to operate a business → licensing and keeping up with gov
regulations
- Variations on the corporate approach
- Only hold shares in other corporations
- Joint ventures or partnerships for major activity
- Can license others to use products, softwares, or intellectual property (patents or
copyrighted materials)
- Franchising: arrangements based on contracts of service and the supply of
products between larger and smaller units of one organization
- Termination of Corps
- Voluntary or involuntarily
- Voluntary: winding-up procedure
- Involuntarily: minority shareholder has been treated unfairly, bankruptcy,
neglect to file the annual return
- Internally or externally
- When going out of business, need to decide the following
- Selling shares: corporation continues with new shareholders
- Assets sold: go through process of debtors, then shareholders, then other people
→ winding up
- Case Law to Mull over
- Dodge v. Ford Motor Company 204 Mich. 459
- Grimshaw v. Ford Motor Co. (1981) 119 CA 3d 757
- BCE Inc. v. 1976 Debentureholders, 2008 SCC 69
- “[i]n considering what is in the best interests of the corporation, directors may
look to the interests of, inter alia, shareholders, employees, creditors, consumers,
governments and the environment to inform their decisions.”
- “[w]here the conflict involves the interests of the corporation, it falls to the
directors of the corporation to resolve them in accordance with their fiduciary duty
to act in the best interests of the corporation, viewed as a good corporate
citizen.”