1. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 16-1 CANADIAN BUSINESS AND THE LAW Second Edition by Dorothy Duplessis Steven Enman Shannon O’Byrne Sally Gunz Presentation prepared by Allan Elliott, Southern Alberta Institute of Technology

2. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 16-2 CHAPTER SIXTEEN THE CORPORATE FORM: OPERATIONAL MATTERS OBJECTIVES:  The liabilities of a corporation  The duties and liabilities of corporate directors and officers  The rights and liabilities of shareholders and creditors  How the corporation is terminated

3. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 16-3 OPERATIONAL MATTERS CORPORATE LIABILITY  liability in tort – primary liability and vicarious liability  primary – entity actually committed the tort in question  identification theory – a corporation is liable when the person committing the wrong is the corporation’s directing mind

4. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 16-4 OPERATIONAL MATTERS CORPORATE LIABILITY  vicarious liability – corporation is liable when the tort has been committed by an agent or employee who is not otherwise a directing mind  same principle applies whether a natural employer, a person or an artificial employer, a corporation

5. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 16-5 OPERATIONAL MATTERS CORPORATE LIABILITY  liability in contract – agency law  outsiders can now generally rely on the apparent authority of agents – the corporation would be liable on the contract  contracts signed on behalf of the corporation should clearly indicate that the person is signing on behalf of the corporation, and is not signing in her personal capacity

6. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 16-6 OPERATIONAL MATTERS CORPORATE LIABILITY  criminal and regulatory liability  criminal liability – judiciary adapts the identification theory  regulatory offences – an offence contrary to the public interest - legislation imposes penalties on the corporation, and sometimes even its directors, including civil liability for damages

7. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 16-7 DIRECTORS AND OFFICERS DUTIES OF DIRECTORS AND OFFICERS  duty of competence  fiduciary duty  self-dealing contracts – a contract in which a fiduciary has a conflict of interest  corporate opportunity – a business opportunity in which the corporation has an interest

8. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 16-8 DIRECTORS AND OFFICERS LIABILITIES OF DIRECTORS AND OFFICERS  liability in tort – may be liable for own tortious conduct  liability in contract – not generally liable for the corporation’s contracts  liability by statute – personal liability for breaching various statutes  indemnification – the corporate practice of paying litigation expenses of officers and directors for lawsuits related to corporate affairs

9. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 16-9 DIRECTORS AND OFFICERS AVOIDING RISK OF PERSONAL LIABILITY make all decisions informed decisions do what is necessary to learn about matters affecting the company identify problems with the company stay appraised of, and attentive to company’s financial and other affairs regularly attend directors meetings and ensure receipt of reliable professional advice

10. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 16-10 SHAREHOLDERS SHAREHOLDER LIABILITY  occasional responsibility for the debts and liabilities of the corporation  lifting the corporate veil – holding the owners of a corporation personally liable for the corporations acts (Salomon principle)

11. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 16-11 SHAREHOLDERS SHAREHOLDER RIGHTS – THREE BROAD RIGHTS  the right to vote  the right to information  financial rights  rights are allocated by directors when issuing different classes of shares

12. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 16-12 SHAREHOLDER RIGHTS DIFFERENT CLASSES OF SHARES  common share – a share that generally has a right to vote, to share in dividends, and to share in proceeds on dissolution  preferred share – a share or stock that has a preference in the distribution of dividends and the proceeds on dissolution

13. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 16-13 SHAREHOLDER RIGHTS RIGHT TO VOTE INCLUDES RIGHT TO:  hold a shareholder general meeting each year  be given notice of the meeting  attend the meeting  ask questions  introduce motions  proxy – a person authorized to exercise a shareholder’s voting rights

14. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 16-14 ELECTRONIC CORPORATE GOVERNANCE TECHNOLOGY AND THE LAW: ELECTRONIC CORPORATE GOVERNANCE Permits  electronic attendance at shareholder’s meetings  meeting to be called, and votes to be held electronically  electronic documents will satisfy statutory requirements and electronic signatures  notices or other information in writing can be met by electronic documents

15. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 16-15 SHAREHOLDER RIGHTS RIGHT TO INFORMATION INCLUDES RIGHT TO:  inspect the annual financial statement  apply to the courts to have an inspector appointed if it can be shown there is serious concern about mismanagement  inspect certain records of the corporation  know whether directors have been purchasing shares of the corporation

16. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 16-16 SHAREHOLDER RIGHTS FINANCIAL RIGHTS INCLUDE:  right to receive any dividend declared by the corporation – cumulative dividend rights of preferred shareholders  share in the assets of a corporation on dissolution  preemptive rights – shareholders right to maintain a proportionate share of ownership by purchasing a proportionate share of any new stock issue

17. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 16-17 SHAREHOLDER REMEDIES A DISSATISFIED SHAREHOLDER MAY:  sell her shares  bring a derivative action – a suit by a shareholder on behalf of a corporation to enforce a corporate cause of action  exercise dissent and appraisal rights  bring an oppression action – a statutory remedy available to shareholders and other stakeholders to protect their corporate interests (oppression remedy)

18. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 16-18 SHAREHOLDER REMEDIES ASSERT A REMEDY UNDER A:  shareholder agreement – an agreement that defines the relationship among people who have an ownership interest in a corporation  unanimous shareholder agreement – an agreement among all shareholders that restricts the powers of the directors to manage the corporation

19. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 16-19 CREDITOR PROTECTION LEGISLATIVE PROVISIONS PROTECTING CREDITORS – CBCA FORBIDS:  corporation paying dividends if doing so would jeopardize its ability to pay own debts as they fall due (liquidity test)  paying dividends if that would make the corporation insolvent  loans to shareholders which render corporation insolvent  on ceasing operations, it must pay creditors first

20. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 16-20 TERMINATION OF THE CORPORATION CORPORATION MAY BE TERMINATED BY:  winding up – the process of dissolving a corporation  lapse – neglect to file annual report or to follow other reporting requirements  court order – shareholder wrongfully treated and this is the only way to do justice  bankruptcy – usually leads to dissolution of the corporation