Business Organisations: Prof

Business Organisations: Prof. Lee

Tuesdays and Thursdays 4:00 – 6:00pm.

1. Introduction: The Corporate Structure

Topic 1.a: The different types of Business Entities

There are 3 different types of Business entities:

·  Unincorporated Businesses

Proprietorships – having 1 person.

Partnerships – having more than 1 person.

·  Corporations – having 1 or more persons.

Proprietorships

A proprietorship involves 1 person carrying on a business without incorporating and without having any partners.

But it could be 1 entrepreneur carrying on business with several employees and does not connote 1 person carrying on the business by himself.

The Entrepreneur is the person who bears the risk associated with carrying on the business and reaps the rewards of success.

Having employees does not subtract from being a sole entrepreneur and proprietor.

Partnerships

A Partnership is defined in the Partnerships Act, R.S.O 1970, c. 339, s.2, as follows:

2. Partnership is the relation that subsists between persons carrying on a business in common with a view to profit, but the relation between the members of a company or association that is incorporated by or under the authority of any special or general Act in force in Ontario or elsewhere, or registered as a corporation under any such Act, is not a partnership within the meaning of this Act.

A.E LePage Ltd. v. Kamex Developments Ltd. (Can. Court of Appeal)

Facts: At first instance the court allowed the claim of the real estate agent respondent for commissions under an exclusive listing agreement. The land was sold by the appellants through another agent. Judgement was given as against the appellants but not against the corporate defendant Kamex.

Issue: Whether the appellants constituted a partnership and, if so, whether the defendant March signed the listing agreement as a partner binding the partnership.

Blair, J.A.: The key words of the definition (in PA s.2) refer to “persons carrying on business in common with a view to profit”. The mere fact that property is owned in common and that profits are derived therefrom does not of itself constitute the co-owners as partners. Section 3, para 1.

3. In determining whether a partnership does or does not exist, regard shall be had to the following rules:

1. Joint tenancy, tenancy in common, joint property, common property, or part ownership does not of itself create a partnership as to anything so held or owned, whether the tenants or owners do or do not share any profits made by the use thereof.

The intention was not to carry on a business; the intention was to provide for a co-ownership.

The test for partnership is whether there are 2 or more people carrying on a business with a view to profit in an unincorporated company.

Supreme Court of Canada concurred.

Corporations

The ease with which one can create a partnership contrasts with that of the Corporation.

Corporations are created through compliance with statutory responsibilities.

CBCA s.9. Effect of certification – A corporation comes into existence on the date shown in the certificate of incorporation.

CBCA s.8. Certificate of incorporation – Subject to subsection 2, on receipt of articles of incorporation, the Director shall issue a certificate of incorporation in accordance with section 262.

(2) Exception – failure to comply with Act - The Director may refuse to issue the certificate if a notice that is required to be sent under subsection 19(2) or 106(1) indicates that the corporation, if it came into existence, would not be in compliance with this Act.

Once you fulfill these formalities you have a corporation. A corporation when coming into existence has legal personality. Therefore, Corporations are capable of acquiring their own legal rights and obligations and can sue and be sued in their known name. A corporation carries on business in its own capacity.

CBCA s.15. Capacity of a Corporation – A corporation has the capacity and, subject to this Act, the rights, powers and privileges of a natural person. (Read with s.45 of the CBCA, and s.26 of the interpretation Act.)

Corporations

Advantages

Disadvantages

1.  Limited Liability CBCA s. 45

1.  Formalities

2.  Perpetual Succession

2.Taxes

3.  Perpetual Existence

4.  Transferability of Interest

Other types of Entities

There have been attempts to get the best of both worlds, that is, the benefits of having an incorporated business and an incorporated business.

·  Limited Partnerships (LP). In a Limited Partnership there are 2 types of partners, general (who carry on business with unlimited liability) and limited partners. In order to preserve this limited liability limited partners must not get involved in the management of the company.

·  Limited Liability Partnership (LLP). All partners here have limited liability, but there can only be a LLP in certain fields of work for example in law firms, and accounting firms. LLP’s are required to have a certain amount of insurance to cover their liabilities.

·  Limited Liability Company (LLC).

Topic 1.c: Conceptions of the Corporation.

According to William T. Allen, the Chancellor of the Court of Chancery of Delaware, there are two competing conceptions of the Corporation.

·  The property conception – Here the corporation is seen as the private property of the shareholders; and its purpose is to advance the purpose of its owners which is usually to increase their wealth and directors are seen as the agents of owners whose function is to faithfully advance the financial interests of owners.

·  The social entity conception – In this view the corporation is not seen as the private property of the shareholders but as an institution, it is not strictly private but tinged with a public purpose. Corporations are seen as institutions in which many parties participate and therefore the decisions made by Corporations should involve the interest of all those involved. Thus, corporate purpose can be seen as including the advancement of the general welfare. The board of directors’ duties extend beyond assuring investors a fair return, to include a duty of loyalty in some sense to all those interested in or affected by the corporation. The interests of society must be taken into account.

Dodge v. Ford

Facts: The Ford company had huge profits at this time and Ford as director of the board wanted to extend social benefits to public through re-investing the companies profits into the business in order to expand it, thereby increasing employment and selling a larger number of cars at a lower price. Therefore, he ceased the paying out of special dividends, which were calculated on the cash surplus of the company, and only issued dividends of 60% per year on the capital of $2,000,000 and none from the surplus of $112,000,000. Two shareholders brought a suit to compel the declaration of dividends not less than 75% of the accumulated cash surplus.

Issue: Whether it was acceptable for Ford to re-invest the companies profits, which would usually be paid out as dividends, into the business.

Ostrander J.: A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end and does not extend to a change in the end itself, to the reduction of profits or to non-distribution of profits among stockholders in order to devote them to other purposes.

The Court ordered Ford to pay the dividend. They rejected his philanthropic ventures. Thus, supporting the property conception of corporations.

It is a classic formulation of the business judgement rule but it is unlikely that cases will arise where a corporation is not paying out dividends.

Parke v. Daily News Ltd (Eng. Court of Chancery)

Facts: Daily News Ltd, which owned two newspapers as well as other businesses concluded that the newspaper business was no longer profitable and decided to sell their interests in the newspaper to Associated News Ltd. The board of directors of Daily News decide that the proceeds of the sale would be distributed to the employees, as there was a concern that the sale would result in lay-offs, and that there might be a legal requirement to make such payments.

Issues: was this a proper allocation of Corporation’s money, which should normally be paid to shareholders?

The payment was invalidated, payments or donations made from the companies funds can only be spent for purposes reasonably incidental to the carrying on of the business. A company’s funds cannot be used to make ex gratia payments, which the court considered this to be.

The board of directors wanted shareholders to approve this transaction, but it was held that even a majority of shareholders could not approve this transaction.

Why did the court not allow the majority to ratify this decision?

Because it was not the majority’s money to spend, but that of the company’s, and the majority can only spend the money of the corporation if they are spending it for the purposes which are reasonably incidental to the carrying on of the business of the company.

If the payments were smaller it could have been argued that the payments were to induce people to join in the other forms of the corporation’s businesses, this payment could be seen as being in the company’s benefit as they would be incidental to its carrying on of business as they would be for public relations purposes or for recruitment purposes. Also, even in the case at present where a transferable company is not winding down, it makes good sense to pay your employees.

This case appears to support the property conception of the corporation, which suggest that the corporation has no obligation to better society and that they are there to make profits not only for the majority, but for all shareholders.

Miles v. Sydney Meat-Preserving Co. Ltd (P.C affirming H.C of Australia)

Facts: The business involved the buying of livestock and converting of it into preserved meat. It was incorporated under special Act, the Act provided that no dividends should be paid out except out of profits. The company was established by the livestock holders of New South Whales and provided that in years of glut market price would not be paid for livestock but a living price would be paid and that in years of bad production the company would not cease production. New South Whales made contributions to the company on the understanding that these policies were followed. The plaintiff, a shareholder and director brought a claim against the company seeking a declaration that the directors were not entitled to carry on the business in the interest of certain shareholders but to carry on the business with a view to earning profits.

Issue: Were the directors compelled to run the company with a view to earning profits for the shareholders?

The High Court of Australia dismissed the shareholders claim and stated that there was no duty of the directors to produce distributable profits, and further stated that whether the company’s objective was to gain profits or achieve any other purpose was a matter of internal politics.

The elements of the property conception seen in this case focuses on what shareholders want. And the social entity aspect seen here is the emphasis, which is placed on the directors’ role to balance competing claims. This case thus, illustrates how the lines between the two concepts can become blurred.

This case also illustrates that in cases such as this majority rules, in direct contrast with the opinion in Parke.

Peoples v. Wise (Quebec Court of Appeal)

Facts: Here there are 2 corporations involved Peoples Department Stores Inc. and Wise Stores Inc. The board of directors of Peoples was also that of Wise and they were also the majority shareholders of Wise. Peoples went bankrupt and a bankruptcy trustee was appointed, who sued the directors and majority shareholders of Wise on the ground that they used Peoples credit to buy inventory for Wise who would then write an “I.O.U” for Peoples. This decision may have been made for the benefit of Wise to whom creditors would extend no more credit but it could not have been for the profit of Peoples because this action left the company bankrupt.