Contracts

							                Corporations

   Separate Legal Person
   Can have one shareholder or many
   Taxed at corporation level
   Limited liability
    – No personal liability for contracts or torts
      of the corporation
          Can only have personal liability for torts if
           some type of personal fault
            – Example: Shareholder/President defames a person
         Corporate Liability
             Example
Shareholder A       Shareholder B   Shareholder C



                  Corporation


                Corporate Assets
         Corporate Liability
             Example
Shareholder A     Shareholder B
                                   $500,000 Stolen by C

                 Corporation       $400,000 Unpaid
                                        Client


                Corporate Assets
                   $100,000
    Protection of Creditors

   Must use proper ending to name on
    contracts to alert creditors
    – Inc, Incorporated, Corporation, Limited or
      Ltd.
   Personal Guarantees or security
    (collateral) usually demanded by
    banks or other large creditors
    – Removes most of the benefit of limited
      liability
       How to Incorporate
   Fill out a form (Articles of Incorporation)
    – File the form with government and pay fees
   Name restrictions
    – Can be just a number
          600340 Saskatchewan Ltd
    – Must be distinctive – cannot lead to confusion
    – Proper ending – Ltd. Inc. …
   Pass bylaws
    – regulates how the corporation is run
       Management of the
          Corporation
   Shareholders appoint a Board of
    Directors
    – Elect after first appointment
    – C.E.O. and other Officers Appointed
   One individual can be a shareholder, a
    director, an officer and a creditor
            Duties of Directors
   Manage and Supervise
    – High level, not day to day details
    – Exercise due diligence in all decisions
           Give each decision the attention its importance demands
   Must avoid conflicts of interest
    – Duty to the corporation not to themselves
   Cannot intercept corporate opportunities
   Cannot compete
   Owe a duty to all stakeholders to a varying degrees
    – Example: Creditors, employees …
          Directors’ Personal
               Liability
   Breaching their duties – corp can sue them
   Unpaid wages for 6 months
   Withholdings (EI, CPP, tax) for 6 months
   Numerous statutory obligations
   Not personally liable for corporate debts or
    judgments against the corporation
   Protection for directors
    –   Due diligence
    –   Corporate indemnity
    –   Director’s liability insurance
    –   Resigning at appropriate time
   Applies to Non-Profit Corporations
      Shareholder’s Rights

   Depends on the class of share
    – Right to vote and elect directors
    – Dividends – if directors authorize
    – If wound up, entitled to remaining assets after
      all creditors paid
   Right to information
    – Financial Statements
    – Annual Reports
    – Loans to directors, employees or shareholders
Shareholders’ Agreement

   Suggested terms to be put in writing
    –   Right to be a director
    –   Right to be employed in a certain position
    –   Dividend policy
    –   Restrictions on type of business
    –   Right of first refusal on sale of shares
            How to value shares
    – Deadlock breaking procedure
    – Anything important to a shareholder
    Minority Shareholder
        Oppression
   Majority has the right to run the
    corporation even if minority
    shareholders strongly disagree
    – Subject to Shareholders’ Agreement
    – Subject to Oppression Remedy
        Application to the Court
        Court can order what it considers to be fair
        Will not interfere with normal business
         decisions no matter how much the minority
         shareholder objects.
         Oppression Example
Shareholder A              Shareholder B           Son of B
(Employee & Director)     (Employee & Director)   (Employee Only)
 (Salary & Dividends)      (Salary & Dividends)       (Salary)

           50%                  50%                  0%




                          Corporation


                        Assets of $5 Million
             A and B each sell
             2.5 % to Son of B
Shareholder A              Shareholder B             Son of B
(Employee & Director)     (Employee & Director)       (Employee)
 (Salary & Dividends)      (Salary & Dividends)   (Salary & Dividends)

           47.5%                47.5%                  5%




                          Corporation


                        Assets of $5 Million
        B and Son of B vote themselves
         to be the two directors, fire A
              and stop dividends
Shareholder A          Shareholder B              Son of B
(Shareholder Only)    (Employee & Director)   (Employee & Director)
                        (Raise and Bonuses)     (Raise and Bonuses)
          47.5%            47.5%                    5%



                       Corporation


                     Assets of $5 Million
Professional Corporations
   Specific professions cannot incorporate a regular
    corporation to conduct their profession
     – Doctors, lawyers, CA’s, …
   Can form professional corporations
   Restricted ownership of shares
     – Professionals involved and immediate family
       members can own shares
   Liability is not limited
   Added administrative costs
   Main benefit is tax savings
            Contract Law

   Freedom to enter into agreements
    under almost any terms you choose
   Contract law provides a framework for
    the enforcement of agreements.
   First two fundamental parts:
    – 1. Offer
    – 2. Acceptance
                  Offer

   Definition: Request to enter into a
    contract which is meant to be binding
    if accepted.
   Offer made by the Offeror
   Offer made to the Offeree
                      Offer

   Inviting someone to do business is not
    an offer
    – Examples:
        Displaying merchandise in a store
        Advertisements are usually not an offer

    – You are inviting customers to make an
      offer
                     Offer

   Communication
    – Can be communicated in any way that
      clearly communicates your intention
    – Offers must be relatively precise
         Cannot be vague
    – Offer must come before acceptance
    Cancellation of an Offer

   Rejection of an Offer
    – Offeree says “no”
    – No longer open for acceptance
    – Offeror can re-extend the offer
   Rejection by Counter-Offer
    – Offeree makes a counter-offer
    – Offeree cannot later accept original offer
    – Negotiation is not a counter-offer
    Cancellation of an Offer

   Revocation
    – Offeror revokes the offer
    – Must be revoked before acceptance
    – Purchase of an Option prevents revocation
          Must agree to pay something extra for the Option
   Lapse of an Offer – Offer expires
    – Specific Time – specified in the offer
    – Reasonable Time – if no time specified
    – Offeror dies or becomes mentally incompetent
Standard Form Contracts

   A pre-printed form (ticket, web-page,
    sign, etc.) which contains all of the
    terms of the offer
   Offeror must take reasonable steps to
    bring all terms to the offeree’s
    attention
Standard Form Contracts

   Unusual or Unexpected terms must be
    specifically brought to offeree’s
    attention or are not enforceable
    – These are terms not expected by a
      reasonable person
              Acceptance
   Must be some positive action
    – Communicated in any meaningful way
    – Offeror can specify what method must be
      used for acceptance or what methods are
      not allowed.
   Silence cannot be acceptance
    – Unless offeree agrees to this in advance
                    Tenders
   Used when bidders sought for a contract
   Creates a contract to enter into a final
    contract
   Bidders must comply exactly with the tender
    requirements or their bid will be rejected
   Owners must treat all bidders fairly when
    evaluating the bids
    – Usually means identically
    – Difficult for owners to reject lowest qualified bid
   Lots of lawsuits in this area
            Consideration

   Third requirement for an enforceable
    contract.
   “Price” each party promises to pay
   Must be mutual or not enforceable
   Exchanged at the time the contract is
    formed
    – Almost always a mutual exchange of promises
    – “Performance” comes later
               Consideration

   Adequacy of Consideration is irrelevant
    – Can be grossly unequal or insufficient
          still enforceable
               Consideration

   Gratuitous Promises are not
    enforceable
    – Promise from one party with nothing in
      return
          Example: I will give you my book for free.
    – Exception: Gratuitous reduction of a debt
      is enforceable
          Example: Bank agrees to accept $6,000 for a
           $8,000 loan and write off $2,000.
            Consideration

   Consideration from the past is not
    consideration
    – Example: I paid you $1,000 to build me
      a fence and you built it. You now agree
      to paint the fence for no extra charge –
      promise to paint it for free is not
      enforceable.
       Other Consideration
             Issues
   Quantum Meruit
    – If no price mentioned, but obvious a price will be
      paid, then must pay a fair price
          This is not an absence of consideration
   Can use a Seal in place of consideration
    – Put red stickers at the signature lines of the
      written contract
    – No consideration necessary
    – Use if concerned one party not providing any
      consideration
      Intention to Create a
       Legal Relationship
   Fourth requirement for an enforceable
    contract.
   Must be a mutual intention to create a
    legal relationship
    – Did the parties appear to intend to enter
      into an enforceable agreement at the
      time?
    – Will be presumed by the Court unless
      proven otherwise
  First Four Requirements
for an Enforceable Contract
   1.   Offer
   2.   Acceptance
   3.   Mutual Consideration
   4.   Mutual Intention to Create a Legal
         Relationship