CORPORATIONS – Spring 2006 – SUMMARY OF ENTIRE TEXTBOOK
Cases, Materials and Notes on Partnerships and Canadian Business Corporations, Harris, Daniels, Iacobucci, Lee, MacIntosh, Puri & Ziegel, Fourth Edition, 2004
Summary by Michael Dew
Chapter 1 – Partnership law principles 1
Chapter 2 – Evolution of business corporations law and the nature of corporate personality. 10
Chapter 3 – The Process of Incorporation 28
Chapter 4 – Management and Control of the corporation 37
Chapter 5: Duty of Care Owed by Managers and Directors to the Corporation 62
Chapter 6 – Fiduciary Duties Owed by Directors and Managers to the Corporation. 79
Chapter 7: Regulating the Exercise of Power by Controlling SHs 123
Chapter 8 – Insider Trading 137
Chapter 9: Shareholder Rights 157
Chapter 10 – Special Aspects of the Closely Held or Private Corporation 193
Chapter 11: Shareholders’ Remedies 202
Chapter 1 – Partnership law principles
Varieties of business organisations (001)
Business must choose between:
- Sole proprietorship
- Partnership
- Business corporation.
Partnership can be general, limited (LP) or limited liability (LLP)
Sole proprietorship (001)
Oldest and simplest.
Generally small but do not have to be.
Thousands of new ones registered each year.
One man does all the decision making.
Only SP’s not carrying on business under the owner’s true name are required to register under the business names act, so actual # of SP likely much higher than registration numbers suggest.
Easy to form and dissolve, so are popular, but do not have advantages of the one person corporation, the SP is personally liable for all debts, unincorporated business has no individual personality.
Partnerships (002)
2 or more carrying on business for profit.
Not much work to form or dissolve, but must register with business names act.
PA says that must give notice to creditors if a partner retires.
Flexible structure, but the partners have unlimited liability (jointly and severally) for the debts of the partnership.
Can limit liability by becoming a limited partner, but then are excluded from full role in management.
Partners in professional firms can form LLP whereby you limit your liability for negligent and other described wrongful acts of other partners, and can still play full role in management.
Can form a partnership between incorporated companies, then will circumvent some of the disadvantages of unlimited liability for general partnerships, but still play full role in management. Even though in general partnership there is unlimited liability for partnership debts, if the corporation (which is one of the partners) has few assets, that will limit the liability.
Business Corporations (003)
Own legal personality, separate from SH, directors and officers.
True even for one person corporation.
Sue and be sued in own name, enter into contracts.
Perpetual succession.
SH are not liable personally for the debts.
Incorporation needs gov approval, must file documents and adopt a corporate constitution, file annual returns.
Incorporate federally, or get extra provincial license to operate in other provinces.
Fees for filing etc on p3.
Must register under business names act.
Must hold meetings to elect directors and give SH’s info, but there are simplified requirements for one person corporations.
Corporations are, b/c of the liability rules, the best for business, but
Professionals can operate under them in many provinces.
May not be worthwhile to incorporate if only a short term venture.
May form a partnership with underlying corporation status.
May be tax advantages to not incorporate à LLP may be better in some cases.
Some SP may not realise how much better incorporation is, and that it is not that hard to do.
The history of partnership law (004)
Unlike in Canada, in England, under the LLP act passed in 2000, a LLP has a corporate personality and is not a “partnership” under the 1890 Partnership Act.
All Canadian provinces have copied the partnership act from England.
The acts generally have the following parts:
- Nature of partnerships
- Relation of partners to persons dealing with them
- Relations of partners to one another.
- Dissolution of partnership
- Miscellaneous.
Partnership act is not a complete code, CL rules still apply where they do not conflict.
Definition of partnership (005)
Sections 2, 3 and 4 of the Partnership Act now defines partnerships.
Historically, was unclear whether right to share in the profits made you a partner.
Grace v. Smith (1775) said that if share in profit then should share in loss. Waugh v. Carver (1793) agreed and said that if you share in profits then should bear liability as well.
This changed in 1860 and hence the current statutory definition.
Cox and Wheatcroft v. Hickman (HL 1860) (006)
Facts:
· Steel business runs into trouble. Creditors form board of trustees to run business and pay off creditors before handing it back. C and W were two of the trustees initially, but then were no longer. After that, the replacement TE’s incurred debts to H. Then H sued the steel company for money, and named C and W as defendants.
· H said that C and W were partners and so were liable.
· C and W argued that they were not partners, and only had an interest original to the debts which they were trying to recover i.e. after that, the company would go back to the original owners.
· C and W said, what if the steel company suddenly made a huge profit, they would not get it, they would take their debts and leave under the contract, so they cannot be liable for the debts of the company.
· C and W said that you must have an ongoing arrangement to share in the profits to be a partner.
Issue:
Where C and W partners and therefore liable?
Held:
Yes they were partners and were liable.
Ratio:
It is a question of interpretation of the contract to determine whether “partners” are agents for each other, and if they are, they bind each other.
Discussion:
Blackburn
· C and W are liable.
· Is a question of interpretation of the deed, did C and W give the TE’s authority to bind them in contract while running the business?
· Is a question of agency, what was the intention of the contract when the creditors set up the trust to run the company.
· Prima facie position is that partners do act as agents for each other.
· Unless those who deal with the firm have notice that the partners do not bind each other, then they can sue all of the partners.
· Says that under the deed, C and W are partners in so far as third persons are concerned.
· Finds that they would have gotten the profits under the deed, so must bear the losses.
Cranworth
· Partners act as agents and bind each other.
· They can specify who will enter contracts, and who will be liable, but must give notice to third parties if third parties are to be bound.
· Public can assume that partners can bind eachother.
· Does not matter that third party did not know that the person they were contracting with had a partner, they can still sue the partner.
· It is not the right to share in profits that makes the partner liable, but that fact that the other partner acts as his agent and carries the trade on on his partner’s behalf.
· So the agency probably means that can share in the profits, but it is the agency not the right to profits which means that the partners bind each other.
Notes
· Our Partnership Act now says that sharing in the profits alone does not make you a partner, but is evidence of it.
· Lending money to a person for use in trade does not make you a partner.
· In Pooley v. Driver (1876) the lenders of the loan went a bit further in the lending contract than just lending, and made themselves partners whether they intended to or not.
A.E. LePage Ltd. v. Kamex Developments (Ltd.) (Ont. C.A. 1977) (011)
Facts:
Real estate agent sued for commission under listing agreement when apartment building was sold. The judgement was given against the defendant “appellants”, but not against the corporate defendant Kamex.
The “appellants” purchased the property, and then the company was incorporated to hold the property in trust for the “appellants”.
The “appellants” decided to sell the property and agreed to not have an exclusive listing agreement. One of the appellants, March, then entered into such an exclusive agreement with the plaintiff. March said he had authority to enter into the agreement on behalf of his partners.
Issue:
Were the “appellants” and Kamex partners, such that Kamex is also liable?
Held:
They were not partners, they never intended to be.
Ratio:
Intent, and the nature of the actual relationship determines if you are partners.
Discussion:
· The mere fact that the property was owned in common and with a view to a profit does not make them partners i.e. this is what the act says.
· It depends on their intentions. Did they intend to “carry on business” or simply to provide an agreement for the regulation of their rights and obligations as co-owners.
· There was no intention in this case, they are just co-owners.
· If there is the intention to allow each party to deal with his share as he wants, then that is not a partnership. The property in a partnership is not divisible amongst the individual partners.
· Partners cannot transfer their interests in the partnership property to others.
· In this case they specifically kept their interests separate for tax purposes. So they each had separate interests, it was not a single property held by the entire partnership.
· They had to give the other owners right of first refusal if they wanted to sell, but that does not make them partners, it confirms their co-owners status.
Notes
· Lansing Building Supply v. Ierullo: agreements said that they were co-owners and not partners. Building supply company sued the other “owners” for unpaid products, Kamex was distinguished b/c property was held as tenants in common, profits were to be shared, and the ability to deal with your individual interest was restricted. Conduct of the parties was also akin to that of partners.
· How is third party to know, should he get each owner / partner to sign the invoice?
· S.7 of PA says that partners bind eachother.
· If the partner says he has authority to bind the others, and he does not, that is breach of warranty of authority, damages explained in Wickberg v. Shatsky.
Legal Personality of Partnership (016)
Thorne v. New Brunswick WCB (NB CA 1962) (016)
Facts:
T and R in lumber partnership. They signed up with WCB and made the payments. T was injured. Applied to WCB for compensation.
Issue:
Was T a workmen employed by the partnership making him eligible for WCB.
Held:
No – cannot have a K with yourself and a partnership is not a separate legal entity.
Ratio:
Partnership is not a separate legal entity.
Discussion:
· The PA essentially codified the CL and equity.
· Under the CL, the partnership had no separate legal existence.
· You cannot enter into a K with yourself.
· T says that partnerships are separate legal entities, so he could be an employee.
· T relies on cases that have found trade unions (formed under statute) to be separate legal entities.
· A writ may be issued against partners in the name of the firm (Worcester City v. County Banking, Rules of Court, 7).
· The partnership act of NB does not make partnerships a separate legal entity.
· The UK act says that in Scotland a partnership is a separate legal entity, but the NB act is a copy, but without that provision, which suggests that the other provisions of the NB act do NOT form a separate legal entity.
· Pollock on Partnerships confirms that in England, although you can sue the partners in the firm name, the firm is not a separate legal entity.
· The English case of Ellis v. Joseph Ellis & Co. is right on point and said that could not be both and employer and an employee, and that a partnership did not have a separate legal personality, so could not recover from WCB.
Notes
· There can be an employer employee relationship between a corporation and its dominant SH (Lee v. Lee’s Air Farming).
· Any change in the partners changes the identity of the firm. What is the property of the firm is the property of the partners, likewise for liabilities. A partners can be the debtor or creditor of his copartners, but not of the firm. A partner cannot be employed by the firm.
· Partners can change the default position by agreeing that death of a partner does not end the partnership, that the name continues, and that so do contracts with employees (staff). So can draft around some, but not all difficulties. If the partnership becomes insolvent, then have to se the individual partners.
· S.8 à can use firm name on instruments, but this is just for convenience, has no substantive consequences.