Week 8 (Corporations)

Question 1

in what instances can directors not declare/pay dividends?↓

Answer 1

Solvency test - if paying dividends would render the company insolvent

Question 2

What are the roles of the board of directors

Answer 2

1.Issues shares of corporation
2.Declares dividends to shareholders
3.Adopts by-laws
4.Calls meetings of shareholders
5.Delegates other responsibilities to officers

public corps must have 3 directors w 2/3 being independent

Question 3

What does section 134 of the OBCA address?↓

Answer 3

explains what is required of directors and officers
Fiduciary duty - act honestly and in good faith in best interests of the corporation
Standard of care - what would be reasonably expected of someon

Question 4

who do directors of corporations owe a duty to - list the section of the act that pertains to this topic↓

Answer 4

Section: Section 122 of the CBCA
directors owe duty to:
shareholders - not just majority shareholders, minority shareholders, future shareholders, etc.
corporation - act in best faith of the corporation
public - employees, government, overall community, suppliers

Question 5

“Defences against a breach of duty for directors” refers to legal arguments or justifications that directors can use to defend themselves if they are accused of not fulfilling their duties properly. Here are a few examples:

Answer 5

Acting in good faith
reasonably relied on others

Question 6

Interest in contracts: If a director also owns part of the company they’re doing business with, they have to tell everyone about it.

Taking business opportunities: Directors can’t keep good opportunities they find for themselves if it’s something the company could benefit from.

Personal benefits from company opportunities: If a director gets something good from a deal that should’ve gone to the company, it’s a problem.

Competing with the company: Directors can’t start their own businesses that compete with the company unless they get permission first.

Question 7

If a company becomes insolvent, then what are directors liable for

Answer 7

They are strictly liable for 6 months’ back wages of employees

Question 8

what is SEDI

Answer 8

SEDI: system for electronic disclosure by insiders
*It is an electronic system in Canada that facilitates the filing and public disclosure of insider trading information.
*Insiders, such as officers, directors, and significant shareholders of publicly traded companies, are required to report their trades and holdings in the securities of their company through the SEDI system

Question 9

What are the rights/duties of shareholders

Answer 9

Rights:
-attached to the shares
-right to vote
-right to receive dividends if declared
-right to remaining assets after dissolution

Duties:
-vote however they want
-no fiduciary duty

Question 10

what does it mean when it is said that a shareholder is locked in? what are some ways a shareholder can be locked in

Answer 10

locked in - shareholder cannot sell the shares of the private corp, either because most private corporation share transfers are restrictive, and shareholders may have great difficulty finding a buyer for minority shares in a private corporation

Question 11

What are the methods of protecting minority shareholders?↓

Answer 11

1. Appraisal remedy - corporation is proposing to change the business of the company, minority shareholder has the right to get their shares appraised and get bought out of company
2. derivative action - a shareholder can go to court as a complainant and apply for permission of court to bring a derivative action on behalf of corporation against the directors
3. windup
4. oppression remedy - board is treating shareholder oppressively, prejudice, or disregards the interest of any shareholder

Question 12

when is a company exempt from a prospectus requirement (allows them to sell shares more quickly and less expensively

Answer 12

“Closely-held Issuer” Exemption

Permits issuers to raise up to $3 million, through any number of financings, from up to 35 investors (other than “accredited investors” described below and current or former directors, officers and employees)

“Accredited Investor” Exemption

Permits issuers to raise any amount at any time from any person or company defined as “accredited investor”, including:
 Sophisticated institutional investors (eg. banks, trust companies, insurance companies, pension funds and government)
 “Wealthy individuals” (financial assets more than $1million or net income more than Cdn. $200,000 or $300,000 with spouse)
 Corporations, LLP’s etc. with net assets of at least Cdn. $5 million
 Persons in “close relationship” to issuer (eg. spouse, parent, grandparent or child of officer or director of issuer, or “control block” shareholder)

Question 13

Sale of shares - shot gun

Answer 13

In a “shotgun” clause for a sale of shares, if one shareholder makes an offer to buy another shareholder’s shares, the other shareholder has the option to either sell their shares at that price or buy the other shareholder’s shares at the same price. It’s like a quick way to resolve disagreements about the value of shares between shareholders.

Question 14

What is Mens Rea

Answer 14

“Mens rea” is a legal term that refers to the mental state or intention behind committing a crime. It’s Latin for “guilty mind.” In simpler terms, it’s about whether someone meant to do something wrong or if they had bad intentions when they committed a crime.

-acting with guilty intention must be proven for offences

Question 15

what are the 3 classes of offences

Answer 15

1. men rea offences
   -prosecution must prove a guilt mind
2. offences of strict liability
   -doing something against the law but explaining you took everything you could to be cateful
3. offences of absolute liability
   -just doing the act against the law make you guilty regardless if u meant to

Question 16

what are the consequences of insider trading for publicly traded companies↓

Answer 16

fine up to $5 million
3 times the profit you made
3 times the loss you avoided
prison for up to 10 years

Question 17

What is the solvency test

Answer 17

If a corporation makes payments to its shareholders when it is insolvent, then the directors may be held personally liable to the corporation

Two criteria for the being “insolvent” include:
1.Corporation is insolvent if the realizable value of its asset are less than its total liabilities
2. If it is unable to pay its debts as they become due

Question 18

To whom are directors’ and officers’ duties owed? What about the board of an Ontario corporation?

Answer 18

SECTION 134 OBCA
Directors’ duties are owed to: (i) the corporation (i.e., “acting in the best interests of the corporation” pursuant to s. 134 OBCA); (ii) its shareholders (all shareholders, not just the “majority” shareholder who may have voted-in the Board of Directors); and (iii) indirectly to “the public” - RECALL CLASS DISCUSSION re interested stakeholders, such as creditors (“solvency test”), employees (“insolvency” – 6 months’ unpaid employee wages and 12 months’ accrued vacation pay), consumers (corporate responsibility for meritorious “product liability” claims) and environment (potential directors’ liability for corporate contamination); see also s. 134 OBCA

Question 19

What is meant when one says that a minority shareholder is (a) “locked in” and (b) “frozen out”?

Answer 19

Minority shareholder is “locked-in” when he/ she cannot sell shares EXCEPT for small fraction of what he/ she believes they are worth. Two reasons for this situation: (i) in most “closely-held” corporations the transfer of shares is restricted, usually requiring the consent of the corporation’s Board of Directors (and Board may refuse to allow a transfer); and (ii) even if a shareholder is to sell, he/she may have great difficulty finding a buyer who would consider acquiring a “minority position” of private corporation (ie. no “liquidity”).

A minority shareholder is “frozen-out” in following manner: (i) the “majority directors” may fire him/her from his/her job within corporation; (ii) they may remove him her from Board of Directors; and/or (iii) they may increase salaries paid to themselves, so that corporation earns no “apparent profit

Question 20

Ten years ago, Davidson and Farmer formed a corporation to develop a fishing lodge that they bought (in the name of the corporation). They each owned 50 shares in the corporation. There were no other shareholders, and Davidson and Farmer were the only directors.
They worked hard to develop the business, which became quite successful. No dividends were ever paid by the corporation, but Davidson and Farmer had paid themselves generous salaries for their work as directors.
Last year, Davidson died. In his will he left his entire estate to his sister, Eriksen. Before her marriage, Eriksen had occasionally worked at the lodge (for a salary) but recently had not been involved in the business.
Shortly after Davidson’s death, Farmer (as the sole surviving director) appointed his niece, Greenberg, as a director to fill the vacancy on the board. Next, Farmer and Greenberg passed a resolution issuing one share in the corporation to Greenberg for a consideration of $10 000 (which was estimated to be approximately 1 percent of the value of the business).
In response to requests from Eriksen, Farmer has agreed to register the transfer of Davidson’s shares to her but has made it clear that he will not agree to her becoming a director and that he intends to continue running the business together with Greenberg.
Does Eriksen have any remedy?

Answer 20

SECTION 248 OBCA
The problem here, from Eriksen’s perspective, is that Farmer and his niece, Greenburg, now effectively “control” the corporation – they are directors and own 51 out of 101 outstanding shares. Eriksen thus risks being “frozen-out”, even though she owns almost half the outstanding shares.

Eriksen’s FIRST LINE OF ATTACK should be to question the appointment of Greenburg to the corporation’s Board of Directors – do corporation’s Articles of Incorporation require that a “vacancy” on the Board of Directors be filled by a shareholder vote, where a “quorum” can not be reached for purposes of a directors’ meeting in accordance with the corporation’s By-laws?; EVEN IF A SHAREHOLDER VOTE WAS NOT REQUIRED IN THE CIRCUMSTANCES OF THIS CASE, Eriksen may argue that the new “share issuance” was invalid, because it was done for the improper purpose of “changing control” of the corporation – the one new share seems to have been issued at a fair price, but there was no apparent need to raise additional capital for the corporation; FINALLY, Eriksen may bring action on grounds that the “affairs of the corporation have been conducted” in manner that was clearly “oppressive” to Eriksen

Question 21

What is meant by the “indoor management rule”?

Answer 21

The “indoor management rule” is a legal principle that protects third parties dealing with a company. It basically says that people outside the company can trust what’s presented to them as the company’s official actions, even if there might be internal irregularities or violations of company rules. So, if someone is dealing with a company, they can rely on the information provided to them, even if there are internal issues within the company.

Question 22

Are there any restrictions on a corporation paying dividends to its shareholders?

Answer 22

Pursuant to the “solvency test”, a corporation may not pay a dividend (or redeem outstanding shares), if: (i) there are reasonable grounds for believing that the corporation is, or would after the payment be, unable to pay its liabilities as they become due; or (ii) the realizable value of the corporation’s assets would thereby be less than the aggregate value of its outstanding liabilities