Business Associations Outline 2011 Gillen

Business Associations Outline 2011 GIllen

Definitions:

Capital: funds provided by lenders and investors to the business to purchase things to run the business: assets of the business

Shares:

-  Directors of the company have the power to issue shares. On receiving shares, 3P becomes shareholder in the company.

-  Shares are bundles of rights – rights such as right to an interest in the distribution of profits by way of dividends, right to a share in the distribution of proceeds on the winding up of the company (does not include a right to the assets of the company)

-  Company may have a set amount of “authorized shares” they are limited to issue – so directors are limited in their power to sell shares up to the authorized number of shares. Directors would have to request to shareholders that their authority to issues shares be extended of they want to sell more than the authorized numbers.

-  share has a value (ex. $1). This doesn’t mean that the share is worth $1 – it is a nominal value assigned to the share.

o  Originally this meant that the SH was liable to pay at least the $1 per value and if the SH had not paid at least the $1, the SH could be called on to pay the difference

-  When a share is issued as “fully paid” – this means that the shareholder paid the price for the share. I not fully paid, the company would have a claim against the SH for the unpaid amount.

Debentures:

-  Document that provides evidence of a debt owed by the person who issues the debenture.

-  Used by companies to borrow money. 3P will lend money to the company.

-  Evidence of debt is usually the payment of interest on the debt, and the debt (or loan) is usually subject to specific terms set out in a document (the indenture) that is incorporated by reference in the debenture.

-  Freely transferable by the debenture holder (different from shares – no right to vote in SH meeting)

-  Debenture can provide for security – so assets can be seized if the person defaults on paying interest or the face value of the debenture (i.e. the amount that is due on the debenture)

o  Security can be in the form of “floating charge:” Doesn’t specify security in any particular assets of the company, but represents an amount that must be paid before other debts are paid on the assets (a charge) that are present at the time of the default in payment on the debenture.

-  So: 3P will lend money to the company, and he can claim the benefit of the debenture if the company defaults (claim the security interest that is on the debenture)

Liquidation: (aka winding-up, dissolution)

-  Company is brought to an end, and the assets and property of the company are redistributed

-  Compulsory liquidation if the company is insolvent: i.e. unable to pay its debts as they fall due

-  Purpose of liquidation where the company is insolvent is to collect in the company’s assets, determine the outstanding claims against the company, and satisfy the claims in the priority order prescribed by law.

-  Liquidator determines the company’s title to property in its possession. Property held by the company in trust for 3Ps does not form part of the company’s assets available to pay creditors.

-  Priority of claims for the company’s assets:

o  Secured creditors are entitled to enforce their claims against the company’s assets to the extent that they are subject to a valid security interest.

§  Creditors with fixed security takes precedence over all claims; security by floating charges may be postponed to the preferential creditors

o  Then creditors without security over the assets have a claim.

-  Dissolution: Having wound-up the company’s affairs, the liquidator will call a final meeting of the creditors, send final accounts to the Registrar, notify the court  company is then dissolved.

Business & The Stakeholders in a Business

-  “Business”: Involves the provision of goods or services

-  Must obtain funds to acquire assets (inventory, equipment, land, etc.)

-  Definition not constrained to for-profit activities and can extend to NFP activities and organizations (charities, gov’t organizations, etc.)

-  Stakeholders: Anyone affected by conduct of business (investors, C’s, managers, Ee’s, customers, suppliers, competitors, local community, etc.)

Different Forms of Association

-  Agency:

-  1. A-P Relationship: Person carrying on business (P) gives another person (A) legal authority to conduct business on his behalf

-  2. A-3P & P-3P Relationships: Raises issues of relationship b/w P & A, P & 3P, A & 3P

-  Sole Proprietorship (SP):

-  1. Single equity investor (the SP) w/ ultimate management authority

-  2. SP can engage agents & hire Ee’s

-  3. C’s (who may impose management constraints): SP usually obtains some funds on credit, so normally one or more C’s

-  C’s have stake in business and may want to place constraints on how SP manages it

-  4. SP not a separate legal entity: SP owns assets of business and K’s personally w/ C’s, Ee’s, suppliers, and customers of business

-  If torts occur in operation of business, sole proprietor personally liable for damages

-  5. Continued Existence: SP extinguished on death of SP (may continue for administering deceased’s estate, but only until assets distributed)

-  Partnership:

-  1. More than One Investor: Each equity investor referred to as a partner

-  Normally, each partner has some say in how business is managed

-  2. Agents & Employees: Partners may conduct business through A’s or hire Ee’s

-  Partners may manage business directly or hire manager and/or management team

-  Agency relationships important b/c, unless otherwise provided, partners themselves are considered A’s for each other

-  3. Creditors: Partnership normally borrows funds, so usually one or more C

-  C’s have stake in business and may impose constraints on management of business

-  4. Partnership is Not a Separate Legal Entity: Partnership cannot enter into Ks w/ other persons, only partners can

-  Where torts arise, partners liable either directly for their part in commission of tort or vicariously

-  Assets of business are owned by partners

-  5. Continued Existence: Relationship b/w partners extinguished upon death or bankruptcy of any partner

-  Partnership may be reconstituted afterwards, and may be statutory or agreed-upon provisions for reconstitution or continuation among remaining partners, but partnership that existed before ceases to exist

-  Limited Partnership:

-  1. Limited Partners w/ Limited Liability and One or More General Partners w/o Limited Liability: Partnership (one or more equity investors) where amount of liability of some investors is limited to extent of their investment

-  General Partner: must have at least one partner whose liability is unlimited

-  2. Involvement of Limited Partners in Management: Limited partners may not have substantial stake in partnership business

-  Stake is limited b/c their liability is limited to the amt of their investment (personal assets not at risk)

-  If investment is small, then stake is small, so involvement in management of business may be less important to them

-  Normally, controls of limited partnerships on mgmt of business are less than controls partners in non-limited partnerships have

-  Involvement of limited partners in business usually constrained

-  3. C’s, A’s, & Ee’s: Limited partnership similar to partnership in terms of having creditors, agents, and employees

-  4. Legal Status: Not a separate legal entity

-  K’s b/w limited partnership and others are, unless otherwise provided, K’s b/w others and all partners (limited and unlimited)

-  Partners, both limited and unlimited, own assets of the limited partnership business

-  Limited Liability Partnership:

-  You are liablefor your own negligence, but your liability to fellow partners is limited to activities you were directly supervising

-  Still personally liable to firm (this not limited), but liability limited in that you are not responsible for fellow partner’s mistakes

-  Recent creation that responds to concerns about increasing scope of liability in large partnerships, esp. professional ones

-  AB, ON, SK, BC, and QC have legislation permitting these partnerships

-  Model (other than BC) allows professional partnerships to form LLP’s where partners are not liable for acts of their fellow partners or Ee’s unless they directly supervised the activity responsible for the loss

-  BC LLP is available on much broader basis than mere availability for professional partnerships

-  Otherwise, LLP’s function as normal partnerships (not a separate legal entity)

-  Corporations:

-  1. Separate Legal Entity: Unlike SP and partnerships, corp is recognized as a separate legal entity

-  Consequences: Corp K’s w/ others and is liable in event of breach of those K’s

-  Corp liable for torts arising from carrying on business conducted through corp

-  Corp owns assets of business, not equity investors

-  2. One or More Equity Investors: Interests of equity investors in for-profit corp’s divided into shares, making equity investors shareholders

-  Shares = bundles of legal rights that investors can assert primarily against the corp

-  Shares do not give shareholders legal title to the assets of corp (corp owns assets)

-  3. Limited Liability of Equity Investors: Shareholder liability limited to amt of their investment (similar to position of limited partners)

-  No constraint on extent to which shareholders can get involved in management of the business (unlike in limited partnership)

-  4. Potential Perpetual Existence: B/c corp is separate legal entity, its existence can be perpetual

-  Shareholders can become bankrupt and die w/o affecting continued existence of corp

-  5. Management: Shareholders can be directly involved in management (esp. where few shareholders)

-  Where many shareholders, common to have management team w/ few or no shares in corp

-  Basic framework for management is that shareholders elect BOD

-  BOD’s appoint officers of corp who either manage corp or delegate management responsibilities to others they hire

-  6. C’s, A’s, & Ee’s:

-  (a) C’s: Corp can K w/ others, so can borrow from others and buy goods on credit (i.e. the corporation can have creditors)

-  (b) A’s & Ee’s: Corp must act through humans acting as “directing mind” of corp or as A’s on behalf of corp

-  As separate legal entity, corp can hire Ee’s (done through A’s)

-  Business Trusts:

-  1. Business Trust: Trust set up as form of association for carrying on business

-  2. Express Trust: One or more persons (settlors) who put title to property in trust in hands of one or more persons (trustees) w/ instructions that trustees hold that property for benefit of other persons (beneficiaries)

-  Settlors, trustees and beneficiaries can all be separate persons, or, settlors may be either trustees, beneficiaries or both

-  Trust Instrument: Sets out details of operation of a trust (law flexible as to how the trust can operate)

-  Trust not a separate legal entity (trustees have title to assets and can transact wrt those assets on behalf of beneficiaries)

-  3. The Business Trust Form of Association:

-  (a) Investors as Settlors and Beneficiaries : Equity investors can invest by settling funds on one or more trustees charged w/ managing funds for beneficiaries (beneficiaries = the investors)

-  (b) Creating Equivalents to Shares, BOD, and Officers : Investor beneficial interests can be divided into units that resemble shares

-  Trust instrument can provide for election of trustees by the beneficiary-investors; replicates corp BOD

-  Trustees can be given authority to delegate aspects of their management duties to others; allows them to engage A’s and hire persons who can be given management duties similar to those given to officers of corp’s

-  (c) Limited Liability: B/c trustees have authority to deal w/ assets, they normally liable wrt torts or K’s arising in course of business

-  If investor-beneficiaries are not trustees, then protected against personal liability (similar to shareholder ltd liability)

-  Since investors do not usually enter into K’s concerning conduct of business, they not liable as a party to such K’s

-  Since trustees are carrying on business, they enter into K’s (personally or through A’s) and are liable for torts committed in conduct of business (directly or vicariously)

-  Two main sources of liability risk for investors:

-  1. Implied right of trustees to be indemnified for their losses by beneficiaries in some situations

-  2. Possibility that trustees will be considered agents of the investors in some situations

-  Trustees can waive right to indemnification and likelihood of trustees being considered agents for investors is small as long as they do not have significant control over business (means risk of personal liability of investors should be small)

-  Co-operative Associations: Are corp’s; unique feature is that they typically distribute profits to members in form other than dividends

-  Tend to have members and any surplus in carrying on business returned to members via lower prices, reduced fees, or other benefits

-  Societies or NFP Corporations: Persons taking on role similar to shareholders called “members”

-  Elect BOD or managers to manage, or supervise management, of NFP corp’s activities

-  BOD or executive committee can engage A’s and hire others to carry on business activities of corp

-  Members vote to amend articles, by-laws, or other constitutional documents of NFP corp

-  Members may receive benefits of activities performed by NFP corp

-  Usually used for charitable activities, but charities need not be NFP corp’s (could be organized as trusts or unincorporated associations)

-  Unincorporated Associations:

-  1. More than One Person, NFP, Activity Carried on in Common: Persons carrying on business in common w/ view to profit = partners

-  If persons act in common but not for profit (and do not form corp), then are members of “unincorporated association”

-  2. No Corporation Formed: Three main ways to form new corp: