AFM231 Chapter Notes - Chapter 16: Fiduciary, Corporate Law, Angel Investor
18 May 2018
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Chapter 16- The Corporation Form: Operational Matters
Business law in practice
• Time-in Team Management Inc has been operating for 2 years now
• Luke owns 55% of the common shares
• Raina owns 45%
• Roger contributed $200k and was issued 100 preferred shares
• An angel investor loaned the company $350k
• The company is doing well, now considering international launch
• One problem raises
• Raina told Luke she wants to buy a junior semi-professional team
• Luke says its stupid eause he thiks this opa is’t ig enough to support its own
sports team yet
• Raina responded if Time-i did’t purhase the tea, she ould for her o opa
whose business purpose would be to buy a team
• Luke deided to sho Raia that he is the oss allig a shareholders’ eetig ad
exercising his right as a majority shareholder, voted Raina off the board of directors and
excluded her from participating in the management of Time-in
• Raina is sad
• Roger does’t at to get ioled i the dispute. He thinks Luke and Raina should focus on
other things e.g. Time-in has not been deducting and remitting income tax on salary paid to
certain employees.
Corporate Liability
Liability in Tort
• Two kinds of liability in tort: primary and vicarious
• Has primarily liability for a tort if it is regarded as the entity that actually committed the tort in
question
• How can a corporation commit its own tort because it works only through human agents?
• Identification theory (a theory specifying that a corporation is liable when the person committing
the rog is the orporatio’s diretig id
• A corporation may have more than one directing mind e.g. VP of marketing is the directing
mind for marketing function and VP of finance is the directing mind for finance functions
• A corporation has vicarious liability when the tort has been committed by an agent of employee
who is not a directing mind
• The la of iarious liailit does’t distiguish etee the atural eploer/principal (breathing
human being) and the artificial employee/principal (corporation)
Liability in Contract
• A corporation is bound by the actions of the agent only if the agent is acting within his actual or
apparent authority
• Historically, a aget’s apparent authority could be limited by filing with the incorporation
douets a speifi liitatio of the aget’s authorit
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• Outsiders will read these and know only if they read it
• this has been abolished and know outsider can rely on the apparent authority of agents
• to avoid personal liability, the person signing a document on behalf of a corporation should ensure
that the document contains a clause clearly indicating that the person is signing on behalf of the
corporation
• pre-incorporation contracts are contracts that have been entered by the opa’s prooters o
behalf of the corporation before its been created.
• It permits the company to adopt the contract and becomes liable to the contract
• The promoter can avoid liability so long as the pre-incorporated contract expressly indicates
that the promoter was acting on behalf of the corporation
Criminal and regulatory liability
Criminal liability
• Corporation has committed a crime if the directing mind committed the crime
• This is difficult to prove beyond a reasonable doubt that the directing mind behaved in a
criminal manner
• Therefore, the federal government amended the Criminal Code which increased the scope
of potential criminal liability of corporations by expanding the range of individuals (now
including senior officers) whose actions can trigger liability, by broadening corporate
responsibility for all criminal offences, and by increasing the penalties
• The amendments also address both crimes requiring proof of knowledge or intent and crimes
requiring proof of negligence
• For intent, an organization will be criminally liable if a senior officer, while acting in the scope of his
authority and intending at least in part to benefit the organization, either actively engages in unsafe
conduct, directs representatives to do it, or knows about it but does nothing to stop it, and death or
injury results.
• For negligence, an organization can be convicted if any representative providing services for the
organization causes injury or death by unsafe conduct and the senior officer in charge of the
activities of the representative depart markedly from the reasonable standard of care necessary to
prevent the incident
• The amendments provide for stiffer penalties and corporate probation orders
• The legislation also enumerates factors that the court must consider when setting fines, including
moral blameworthiness (i.e., the economic advantage gained by the organization by committing the
crime), public interest (i.e., the cost of investigation and prosecution, the need to keep the
organization in business), and the prospects of rehabilitation (remedial steps directed to preventing
the likelihood of a subsequent offence)
• A corporate probation order may involve conditions such as providing restitution to victims, pushing
the offense in the media, and implementing policies and procedures
Regulatory Offences
• Regulatory offence- an offence contrary to the public interest
• E.g. liability related to taxation, human rights, pay equity
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• E.g. the Income Tax Act requires that every person paying salary, wages, or other remuneration
withhold a prescribed amount of income tax. Time-in is a person paying salary so it comes within the
provisions of the legislation
• Its failure to deduct and remit income taxes can trigger penalties
Directors and Officers
• Directors who are elected by shareholders, manage the management of the business and the affairs
of the corporation
• They also have specific powers and obligations set out in legislation e.g. can declare
dividends, call shareholder meetings, adopt bylaws, and issue shares
• They are not in a position to carry out actual management themselves. Only authorized to
appoint officers to carry out many of their duties and exercise most of their powers
Duties of Directors and Officers
• Two broad categories: a fiduciary duty and a duty of competence
The fiduciary duty
• Requires the directors to act honestly and in good faith with a view to the best interests of the
corporation
• Directors and officers must not allow their personal interest to conflict with their duty to the
corporation
• Fiduciary principle arises in multiple circumstances, see the two below
Self-dealing contract
• This is a contract in which a fiduciary has a conflict of interest
• E.g. Time-in requires some office furniture and Luke has some of his own furniture he wants to sell.
The conflict of interest is that the corporation want to buy it at as low of a price as possible but Luke
want to sell at as high a price as possible
• Uder the Caada Busiess Corporatios At, Luke’s otrat to sell furiture to his o opa
will be enforceable provided that:
• Luke discloses the contract to the corporation in writing
• Luke does’t partiipate i a ote of the diretors approig the contract
• The contract is fair and reasonable to the corporation
• Failure to follow gives the corporation the right to ask a court for remedy, including that the
otrat e set aside or aelled
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Document Summary
He thinks luke and raina should focus on other things e. g. time-in has not been deducting and remitting income tax on salary paid to certain employees. It permits the company to adopt the contract and becomes liable to the contract: the promoter can avoid liability so long as the pre-incorporated contract expressly indicates that the promoter was acting on behalf of the corporation. Time-in is a person paying salary so it comes within the provisions of the legislation. Its failure to deduct and remit income taxes can trigger penalties. Only authorized to appoint officers to carry out many of their duties and exercise most of their powers. Duties of directors and officers: two broad categories: a fiduciary duty and a duty of competence. Self-dealing contract: this is a contract in which a fiduciary has a conflict of interest, e. g. Time-in requires some office furniture and luke has some of his own furniture he wants to sell.
