BUSI 3005 Chapter 16

Corporate Liability

• A corporation is a legal person in the eyes of the law

• It commits torts and crimes through human agents

Primary Liability

the entity itself that commits the tort

Vicarious Liability

• liability for the torts of agents/employees of company

• employer and employee are liable

  • employer is liable for employee’s actions

Identification theory

• when a corporation has primary liability in tort; if the directing mind and will of the organization knew or ought to have known that the corporation’s actions would cause damage

• 2 part test

ID theory 2 part test

• Was the wrongful act committed by a directing mind (CEO, president, manager)?

  • Capacity to exercise decision-making authority on matters of corporate policy, rather than merely to give effect to such policy on an operational basis

• If yes, was the wrongful action

  • Within the field of operation (scope) assigned to them

  • Not totally in fraud of the corporation

  • By design or result, partly for the benefit of the company

Criminal and Regulatory Liability of Corporations

• directing mind clause of ID theory doesn’t apply criminally

• all employees, not just of “directing mind” can be liable

  • recklessness, turning a blind eye, acting negligently

Liability of Directors & Officers

• Directors are elected by shareholders to supervise the management of a company

• Officers (CEO, CFO, COO) are elected by the directors

• Directors are ultimately responsible for activities of officers

Duties of Directors and Officers

• Fiduciary Duty

• Duty of Competence

Fiduciary Duty

• duty to act honestly and in good faith with a view to the best interests of the corporation

• avoiding real and potential conflicts of interest

Duty of Competence

• Must exercise the “care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances”

• Do what you’re told

2 potential conflicts of interest

• “Self-dealing contracts”

  • Director of company who needs new building built who also own construction company

• “Corporate opportunities”

  • Talent agent repping movie stars for a company who can make more money opening own talent company

managing conflicts of interest

managed by a director/officer:

• disclosing the conflict of interest to the company in writing

• not participating in any vote relating to the conflict of interest

Personal Liability of Directors and Officers

• liability in torts

• liability in contracts

• liability for statutory offences

liability in torts

• directors and officers can be held liable, even when carrying out their duties in good faith

• each are held liable for their own torts

• personal liability for intentional torts

liability for statutory offences

• personal liability for breaching various statutes

• some statutes impose potentially serious penalties on not only the corporation but also officers and directors for failure to comply

  • environmental protection legislation, tax laws, occupational health and safety

Lifting the Corporate Veil

• when the court will make shareholders personally responsible for the debts and obligations of the company

• courts are generally relectant to do this, except when they’re satisfied that a company is a “mere facade” concealing the true facts

  • must be shown that there’s complete domination and control by shareholder and that corporate form was used as a shield for conduct akin to fraud

Fraudulent conveyances

If shifting assets around to evade creditors, courts can still go after those assets

Shareholder Rights

generally to all shareholders:

• right to vote

  • attending meetings

• right to information

  • inspect annual financial statements

• financial rights

  • to receive dividends

they’re allocated by directors when issuing different classes of shares

Shareholder Remedies

angry shareholders can:

• sell their shares; or

• dissent and appraisal, derivative action, or oppression remedy

dissent and appraisal

if you diagree with what company is doing, you can have your shares given to you

derivative action

• if you’re unhappy about company decisons and directors don’t care, you can go to court and judge will allow you to make decisons directors usually make

• must prove:

  • action is in company’s best interests

  • acting in good faith

oppression remedy

• most powerful

• available to stakeholders, not just shareholders

• applies where “reasonable expectations of the shareholder about management conduct have not been met”

• 51% partner and 49% partner

• judge decides reasonable punishments (options are limitless)

shareholders agreement

• Agreement that defines the relationship among people who have an ownership interest in a corporation

• Any 2 shareholders can sign

unanimous shareholders agreement

• Agreement among all shareholders that restricts the powers of the directors to manage the corporation – and gives those powers back to the shareholders

• Legally binding

• All shareholders need to sign