Internal Affairs

Question 1

Sole Proprietorship

Answer 1

• Unincorporated business owned by a single individual
• Individual is sued in his/her own name
  
  • but if you want to name your own business, you have to register that business

Question 2

Partnership - unlimited, limited, LLP

Answer 2

• Unlimited liability: when there’s one partner that has all the burden if the business has a debt
• Limited partnership: just liable for the amount that you invested
• Limited liability partnership (LLP): allows partnership to limit liability for the torts → if one partner doesn’t pay, only that partner is liable

Question 3

Corporation

Answer 3

• a legal person formed by the act of incorporation according to a prescribed legal procedure
• a separate legal entity
• most corporations are closely held corps where they don’t publicly sell shares but they are sold only internally

Question 4

The Canada Business Corporations Act (CBCA)

- difference between affairs and business

Answer 4

• statutes differentiate between “business” and “affairs.”
  The difference -> the affairs are the internal relationships and arrangements among those responsible for running a corporation—the directors and officers—and its main beneficiaries, the shareholders
• the business involves the external relations between a corporation and those who deal with it as a business enterprise—its customers, suppliers, creditors, and employees
• shareholders are in both

Question 5

Recommendations for Publicly Traded Corps

Answer 5

• A majority of directors should be independent.
• The CEO should not also hold the position of chair of the board. The corporation should establish separate, independent committees of the board to address executive compensation and nomination of board members.
• The corporation should adopt and publish a “code of ethics.”
• The board should perform regular self-assessments.

Question 6

Business Corporations Should Have:

Answer 6

Shareholders, Board of directors and officers

Question 7

Audit Committee
Compensation Committee
Nominating Committee

Answer 7

1. at least 3 directors make up audit
2. responsible for setting director and officer compensation
3. responsible for finding new directors

Question 8

Role of Directors

Answer 8

• Power to issue shares
• Power to declare dividends
• Power to adopt by-laws governing the day-to-day affairs of the corporation
• Power to call meetings of the shareholders
• Delegate responsibilities

Question 9

Duties of Directors

Answer 9

1. every director and officer of a corporation in exercising his powers and discharging his duties shall:
   a) Act honestly and in good faith with a view to the best interests of the corporation; and
   b) Exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances
2. Every director and officer of a corporation shall comply with this Act, the regulations, articles, by-laws and any unanimous shareholder agreement

Question 10

Duties of Care and Skill

Answer 10

• Cannot be negligent – standard of the ordinary person
• Can rely on information provided to them as long as they are not wilfully blind
• If a director acquiesces in situations of misconduct or negligence, then s/he can be held PERSONALLY liable
• If a director votes for a decision that is financially detrimental to the corp. & the corp. becomes insolvent, then s/he can be held PERSONALLY liable – for employees unpaid wages
• If taxes are not paid – directors can be held PERSONALLY liable – for HST, and employee deductions

Question 11

Defences

Answer 11

1. Due diligence
   
   • Acted diligently
   • Relied on audited financial statements
2. Good faith reliance
3. Corporate indemnity: An agreement with the corporation to reimburse a director or officer for any costs associated with liability for breach of duty is enforceable provided that the director acted honestly, reasonably, and in good faith
4. Directors’ and officers’ liability insurance: A corporation may purchase directors’ liability insurance on behalf of its board

Business Judgment Rule
- courts will grant business experts the benefit of the doubt and not easily criticize a business decision

Question 12

Fiduciary Duties

Answer 12

• Must place corp. ahead of own interests
• Must avoid conflicts of interest
• Must declare a conflict of interest and cannot vote on the matter
• Cannot intercept a Corporate Opportunity
• May not carry on business in competition with the Corp.

Question 13

Breach of a fiduciary duty

Answer 13

• Held liable to corporation for loss sustained arising from breach
• Any property acquired by the director as part of the breach will be held in the name of the corporation as a constructive trust
• Where property has been transferred to a bona fide purchaser for value, director will be liable to account for profits

Question 14

Insider Trading

Answer 14

the use of confidential information relating to a corporation in dealing in its securities

a. to compensate the seller or purchaser (as the case may be) for any loss suffered as a result of the transaction, and
b. to account to the corporation for any benefit or advantage obtained.45

Question 15

Shareholders Rights

Answer 15

• CBCA requires that the constitution of the Corporation set out classes of shares (including rights, privileges, or restrictions associated with the class)
• Where there is only one class, the rights must include:
  
  • Right to vote at any meeting of the shareholders
  • Right to receive any dividend declared
  • Right to receive remaining property on dissolution

Question 16

Shareholder Voting

Answer 16

• Method by which SH can exercise their voice on how the corporation should be run
• Takes place at General Meeting of SH
• SH entitled to advance notice of any meeting
• Voting is the passing or defeating of resolutions
  
  • Ordinary resolution requires a simple majority vote
  • Special resolution requires 2/3 majority
• Ability to vote depends on class of shares
• Closely held corporation – often some classes of shares have more votes
• In widely held corporations, SH can nominate a proxy to vote on their behalf

Question 17

Ordinary Resolutions

Answer 17

• approval of any amendments made by the directors to the by-law
• election of the auditor
• election or removal of directors

Question 18

Special Resolutions

Answer 18

• approval of altercations to articles of incorporation

- approval of certain other fundamental change

Question 19

Return on investment

Answer 19

1. dividends

2. capital growth

Question 20

Issuing new shares

Answer 20

• Power lies with the board
• Majority SH could lose majority position with an new issue
• In USA – concept of “pre-emptive rights”
• In Canada – no such right, but directors can only issue shares for purpose of raising capital
• If purpose is to affect voting rights of majority, then the issue may be declared void

Question 21

Right to Information

Answer 21

• SH must be shown financial information
• SH are empowered to elect an auditor who in turn checks the statements for fairness in advance of the AGM and reports to the SH
• Both auditor’s report and financial statements must be sent to SH (usually 3 weeks) prior to AGM
• Auditor has access to books of corporation, but SH does not
• SH can send a request to the auditor or directors to check books for discrepancies, but neither has to oblige
• SH would have to ask courts to have an inspector appointed
• are entitled to examine documents of record including:
  • Minute books of meetings of SH
  • Register of all transfer of shares
  • Copy of the corporation’s charter
  • Copy of by-laws (or articles) and special resolutions
  • Register of SH
  • Register of directors
  • Documents of record excluded: Minutes of directors’ meetings

Question 22

Duties of Shareholders

Answer 22

• none

- Even if s/he is a director, s/he is entitled to consider her/his own interests when voting as a SH

Question 23

Protection of Minority Shareholders

Answer 23

• where there is a majority shareholder, often minority shareholders are “frozen out” of the decision making process
• Often they can’t dispose of their shares, so they are “locked-in”
• ex. when theres no market for selling shares when its not a publicly traded share, you are locked into the shares and frozen out of making decision making because you are a minority shareholder
• BCA s. 190 – allows a minority SH who dissents on changes to the corporation to have the corporation buy back his/her shares
• Where a price cannot be decided, then the court will set a price
• This is called the Appraisal Remedy

Question 24

Appraisal Remedy

Answer 24

• The right to have one’s shares bought by the corporation at a fair price
• Restricted to only certain types of actions
• In order to take advantage, the SH must abide by all requirements in the act – can be quite cumbersome
• Really only useful in closely held corporations

Question 25

Derivative Action

Answer 25

derivative action is a remedy meant to address harm to the company, rather than harm to an individual shareholder

• Proceedings brought by one or more shareholders in the name of the corporation in respect of a wrong done to the corporation
• SH must make application to court to obtain leave to bring the action and show:

a) The directors are unwilling to bring the action;
b) That he is acting in good faith; and
c) It appears to be in the interest of the corporation or the shareholders that the action be brought

• court can order the corporation to pay the costs of the shareholders in bringing the action
• Should defendant lose, court may order any amount awarded be paid directly to the shareholders, rather than the corporation

Question 26

Winding Up

Answer 26

• Dissolution for liquidation of a corporation
• Under the CBCA, where it is “just and equitable to do so”
• Courts are often reluctant to do this if the corporation is viable and of a reasonable size re: other stakeholder interests

Question 27

Oppression Remedy

Answer 27

• Statutory procedure allowing individual shareholders to seek a personal remedy if they have been unfairly treated
• Most popular remedy in Canada
• Remedy has been granted wider scope by allowing judges to make alternative orders

To justify the remedy, plaintiff must show that the action complained of:

a) Has been oppressive or unfairly prejudicial; or
b) Unfairly disregards the interests of the complainant
- Remedy is usually to have corporation buy back the complainant’s shares at fair market value

Question 28

Shareholder Agreements

Answer 28

• agreement between two or more shareholders that is distinct from the corporation’s charter and by-laws
• Shareholder agreements can only apply to the parties in their capacity as shareholders – it cannot fetter the discretion of a director
• Shareholder agreements may include such terms as:
  
  • Right to employment
  • Right to participate in management of the business
  • Right to a fair price for a share interests
• Unanimous Shareholder Agreement
  
  • A shareholder agreement to which ALL shareholders are parties
• CBCA allows for a USA to fetter powers of directors
• USA is only possible in a closely held corporation
• Presence of the USA must be conspicuously stated on any share certificate – new shareholders are held party to the agreement