Law Class 2: May 12

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  1. Lee v Lee's Air Farming Ltd
    Lee v Lee’s Air Farming Ltd [1960] UKPC 33 is acompany law case from New Zealand, also important forUK company law and Indian Companies Act 2013, concerning the corporate veil and separate legal personality. The Judicial Committee of the Privy Councilreasserted that a company is a separate legal entity, so that a director could still be under a contract of employment with the company he solely owned.[1]

    FACTS:

    Catherine Lee’s husband Geoffrey Lee formed the company through Christchurch accountants, which worked in Canterbury, New Zealand. It spread fertilisers on farmland from the air, known as top dressing. Mr Lee held 2999 of 3000 shares, was the sole director and employed as the chief pilot. He was killed in a plane crash. Mrs Lee wished to claim damages of 2,430 pounds under theWorkers’ Compensation Act 1922 for the death of her husband, and he needed to be a ‘worker’, or ‘any person who has entered into or works under a contract of service… with an employer… whether remunerated by wages, salary or otherwise.’ The company was insured (as required) for worker compensation.The Court of Appeal of New Zealand said Lee could not be a worker when he was in effect also the employer. North J said[2] "the two offices are clearly incompatible. There would exist no power of control and therefore the relationship of master-servant was not created."

    • ADVICE
    • The Privy Council advised that Mrs Lee was entitled to compensation, since it was perfectly possible for Mr Lee to have a contract with the company he owned. The company was a separate legal person. Lord Morris of Borth-y-Gest said“It was never suggested (nor in their Lordships’ view could it reasonably have been suggested) that the company was a sham or a mere simulacrum. It is well established that the mere fact that someone is a director of a company is no impediment to his entering into a contract to serve the company. If, then, it be accepted that the respondent company was a legal entity their Lordships see no reason to challenge the validity of any contractual obligations which were created between the company and the deceased...It is said that the deceased could not both be under the duty of giving orders and also be under the duty of obeying them. But this approach does not give effect to the circumstance that it would be the company and not the deceased that would be giving the orders. Control would remain with the company whoever might be the agent of the company to exercise...There appears to be no great difficulty in holding that a man acting in one capacity can make a contract with himself in another capacity. The company and the deceased were separate legal entities.

  2. salomon vs salomon
    Salomon v Salomon & Co Ltd [1896] UKHL 1 is a landmark UK company lawcase. The effect of the House of Lords' unanimous ruling was to uphold firmly the doctrine of corporate personality, as set out in the Companies Act 1862, so that creditors of an insolvent company could not sue the company's shareholders to pay up outstanding debts.

    Facts

    • Salomon v Salomon & Co Ltd [1896] UKHL 1 is a landmark UK company lawcase. The effect of the House of Lords' unanimous ruling was to uphold firmly the doctrine of corporate personality, as set out in the Companies Act 1862, so that creditors of an insolvent company could not sue the company's shareholders to pay up outstanding debts.
    • The liquidator, on behalf of the company, counter-claimed wanting the amounts paid to Salomon paid back, and his debentures cancelled. He argued that Salomon had breached his fiduciary duty for selling his business for an excessive price. He also argued the formation of the company in this was fraud against its unsecured creditors.

    Issues


    The liquidator, on behalf of the company, counter-claimed wanting the amounts paid to Salomon paid back, and his debentures cancelled. He argued that Salomon had breached his fiduciary duty for selling his business for an excessive price. He also argued the formation of the company in this was fraud against its unsecured creditors.


    Judgement

    The Court of Appeal[2] confirmed Vaughan Williams J's decision against Mr Salomon, though on the grounds that Mr. Salomon had abused the privileges of incorporation and limited liability, which Parliament had intended only to confer on "independent bona fide shareholders, who had a mind and will of their own and were not mere puppets". Lindley LJ (an expert on partnership law) held that the company was a trustee for Mr Salomon, and as such was bound to indemnify the company's debts.[3]“Lindley LJ was the leading expert on partnerships and company law.The incorporation of the company cannot be disputed (see s. 18 of the Companies Act 1862). Whether by any proceeding in the nature of a scire facias the Court could set aside the certificate of incorporation is a question which has never been considered, and on which I express no opinion; but, be that as it may, in such an action as this the validity of the certificate cannot be impeached. The company must, therefore, be regarded as a corporation, but as a corporation created for an illegitimate purpose. Moreover, there having always been seven members, although six of them hold only one 1l. share each, Mr. Aron Salomon cannot be reached under s. 48, to which I have already alluded. As the company must be recognised as a corporation, I feel a difficulty in saying that the company did not carry on business as a principal, and that the debts and liabilities contracted in its name are not enforceable against it in its corporate capacity. But it does not follow that the order made by Vaughan Williams J. is wrong. A person may carry on business as a principal and incur debts and liabilities as such, and yet be entitled to be indemnified against those debts and liabilities by the person for whose benefit he carries on the business. The company in this case has been regarded by Vaughan Williams J. as the agent of Aron Salomon. I should rather liken the company to a trustee for him - a trustee improperly brought into existence by him to enable him to do what the statute prohibits. It is manifest that the other members of the company have practically no interest in it, and their names have merely been used by Mr. Aron Salomon to enable him to form a company, and to use its name in order to screen himself from liability. This view of the case is quite consistent with In re George Newman & Co.[4] In a strict legal sense the business may have to be regarded as the business of the company; but if any jury were asked, Whose business was it? they would say Aron Salomon's, and they would be right, if they meant that the beneficial interest in the business was his. I do not go so far as to say that the creditors of the company could sue him. In my opinion, they can only reach him through the company. Moreover, Mr. Aron Salomon's liability to indemnify the company in this case is, in my view, the legal consequence of the formation of the company in order to attain a result not permitted by law. The liability does not arise simply from the fact that he holds nearly all the shares in the company. A man may do that and yet be under no such liability as Mr. Aron Salomon has come under. His liability rests on the purpose for which he formed the company, on the way he formed it, and on the use which he made of it. There are many small companies which will be quite unaffected by this decision. But there may possibly be some which, like this, are mere devices to enable a man to carry on trade with limited liability, to incur debts in the name of a registered company, and to sweep off the company's assets by means of debentures which he has caused to be issued to himself in order to defeat the claims of those who have been incautious enough to trade with the company without perceiving the trap which he has laid for them.
  3. Methods of carrying on business in Canada
    Sole Proprietorship

    Partnership

    Corporation
  4. Sole Proprietorship
    A business which has no legal existence separate from its owner.SP is NOT a legal entity. Can operate under name of owner or under fictitious name.  E.g. Dan So Just a Guy, Dan So FixaBike, EXCEPT you can't name your business something that is already out there (e.g. Disney Corp).  Subway example - foot long not actually a foot long.


    The sole proprietorship is the simplest business form under which one can operate a business. The sole proprietorship is not a legal entity. It simply refers to a person who owns the business and is personally responsible for its debts.
  5. Sole Proprietorship Benefits/Pros
    • Simplicity, simplicity, simplicity…
    • Ease of formation
    • Ease of dissolution/stop doing business
    • Simple and beneficial tax treatment (kind of)

    This is your income... need to add it to your taxes.  The advantage of this is that you can write off supplies, reducing your "income" so reducing the amount of tax you have to pay

    If you make less than $60,000 then it doesn't make sense to incorporate because of fees etc

    Very little steps/registration etc
  6. Why NOT choose a Sole Proprietorship
    • No perpetuity of existence (people die, so too does your business)
    • No limitation of liability (e.g. no separation of $$, if someone sues your business they are suing you)
    • No small business tax advantage (kind of)

    • Legal Status of SP
    • ¡¡No separate legal personality between business and individual¡Common asset ownership

    ¡Effect on contracts?¡ (if you default on the contract it's YOU on the line!)

    Effect on torts?  (you can be sued)

    Effect on financing? (e.g. loans - the bank would give you personally the loan, which means if you default they come after you personally)

    • Implications on Liability
    • UNLIMITED personal liability.
    • MAY be able to negotiate limited personal liability in some circumstances, but rare (Small Business Loans, for instance).
  7. What is a Partnership?
    Persons carrying on business in common with a view to a profit (where that business is not incorporated)

    • Partners are agents for one another
    • Partners owe each other fiduciary duties

    Share in profits; Share in losses, share in company stake.  

    A legal form of business operation between two or more individuals who share management and profits. The federal government recognizes several types of partnerships. The two most common are general and limited partnerships. .
  8. Benefits of partnership
    SIMPLICITY!! 2 or more people

    • Ease of formation
    • Almost unlimited flexibility
    • Tax advantages (kind of)
    • Popular with professionals
    • Maybe I didn’t choose a partnership…

    Lawyers, doctors, common in partnerships... because they have liability.  This is preferred by the colleges.
  9. Can Sole Proprietorship have employees?
    Yes
  10. Partnership acts say...
    If there is no legal agreement, then the terms of the partnership act (equal stakes in the company/split) will apply
  11. Drawbacks to being a partner?
    Unlimited personal liability

    Liability for actions of partners - e.g. if Marcus does something poorly and we get sued for it, Dan can be sued as well.  If Marcus gets a bank loan in the name of the partnership but doesn't pay it, Dan becomes liable

    Sometimes when people go into business together, and they don't define their business, a creditor can come along and try to assert that a partnership exists... to get more money.  

    • Implications of Partnerships:
    • No separate legal personality between business and individual(s)
    • Recall, SP is the same…no separate legal personality between business and individual¡Implications? Survival?Creditor?

    If one partner dies, the partnership is dissolved and they become sole proprietorships 

  12. What are 5 major concepts of partnership liability?  The partnership act rules of liability
    NO liability (e.g. arguing that you are not partners)

    Liability BEFORE partner

    Liability WHILE partner

    Liability of a FAKE partner

    Liability AFTER partner
  13. Partnership Act - when partners have no liability to one another
    When the liability is not related to the business

    If the event creating the liability occurs BEFORE that person becomes a partner
  14. Liability while you are a partner
    YOU ARE RESPONSIBLEE!!!!! :)
  15. Liability of a fake partner
    If you know someone who is holding out as a partner, and they do a bad act, the liability extends to you.

    E.g. the example of the jet skiis and the kid who asked their dad for a letterhead and used it to get a bank loan.  The company was liable.
  16. Liability after partner
    The only reason I went to that law firm is because I thought he was in it..


    You have to take a positive step to say you are retired.  E.g. taking out a newspaper ad.  Or sending a note out to all clients.
  17. What is a corporation? (on test next week?)
    • A legal entity, created under the authority of a statute  (permission of the government), which permits a group of people, as shareholders, to apply to the government for an independent organization to be created, which then pursues set objectives, and is empowered with legal rights usually only reserved for individuals, such as to sue and be sued, own property, hire employees or loan and borrow money.
    • E.g. can own property in it's own name, be sued, sue someone, enter contracts... etc

    A corporation is a legal entity that is separate and distinct from its owners. Corporations enjoy most of the rights and responsibilities that an individual possesses; that is, a corporation has the right to enter into contracts, loan and borrow money, sue and be sued, hire employees, own assets and pay taxes.
  18. Three parties that are involved with corporations
    Shareholders (and shares)

    Directors (and the boards thereof)

    Officers (those with the fancy titles)  Eg CEO
  19. Benefits to corporations
    • ¡LIMITED LIABILITYPersonal assets are preserved because the corporation gets sued.
    • Perpetual existence They live forever!!
    • Ease of Transfer of ownership  Buying and selling shares!
    • Can add equity simply
    • Tax advantages (although some tax disadvantages) Much lower tax rate than individuals.  The disadvantage is paying yourself (e.g. taking out a dividend)


    Perpetual life ... they live together

    Reduces liability... if shareholders do something... that's their fault


    • PROS
    • Owner Protection from Legal Liability: Once a new business's owner(s) successfully completes the incorporation process, the owner(s) have a limited amount of legal liability for the corporation's business activities and debts, because in the eyes of the law the corporation is a separate entity. In order to maintain this limited liability, the corporation's owners must follow a number of legally required corporate formalities.

    Ability to Attract Investors: The corporation's ability to issue stock is a strong selling point to those willing to invest capital in a business venture.

    Power Structure: The corporate business form has an established power and management structure: directors, officers, and shareholders. Each group has its own set of clearly-defined roles and responsibilities within the corporate framework. See "Corporate Structure: Directors to Shareholders" for more details.Stock and Stock Options for Employees: Especially for larger businesses, the corporate business structure offers an appealing opportunity to potential employees -- stock benefits and stock options (the employee's right to buy stock at a locked-in price).- See more at: http://smallbusiness.findlaw.com/incorporation-and-legal-structures/pros-and-cons-why-form-a-corporation.html#sthash.r4J3MZX4.dpuf
  20. Stora kopperberg
    The great copper mountain company

    Company was around for a thousand years... no business could do this unless it was a corporation.

    This company produced 2/3rds of all the copper used in Europe was from this one mine


    Stora, which claims to be the world’s oldest existing joint-stock company, has gone through several transformations during its 700-year history. Throughout most of its life, Stora was one of Europe’s largest copper producers as its official name Stora Kopparbergs Bergslags (The Great Copper Mountain Mining Company) indicates. It was Sweden’s first, and for a considerable period only, major enterprise of international significance. As copper output declined in the 19th century, Stora diversified into iron and steel production as well as forestry products. It remained active in these sectors until the 1970s, when it decided to concentrate on the pulp and paper industry. As a result of a series of acquisitions in the 1980s, Stora has become Europe’s largest forestry company.
  21. Negatives of corporations
    • Costly
    • Unwieldy  Can't just do things swiftly... have to register attentions with the government
    • Maintenance Audited financial savings, have to have a lawyer to do annual report, etc...
    • Tax disadvantages (although some tax advantages)


    “The corporate form has been wholly perverted by the sale of company stock to ignorant men, drawn in by the reputation, falsely raised and artfully spread, concerning the thriving state of the stock”

    CONS

    Time and Cost of Incorporation: The incorporation process can be expensive and time-consuming. A number of documents must be prepared (including the new corporation's articles of incorporation and bylaws), and filing fees must be paid to your state's Secretary of State office (or similar business filing agency).

    Following Corporate Formalities: All corporations are required by law to observe a number of corporate formalities to ensure that the corporation is operating as a separate entity, independent of the business's owners. These steps include holding regular meetings of directors, keeping records of corporate activity, and maintaining the corporation's ongoing financial independence. See "The Basics of Small Business Incorporation" to learn more.Potential Tax Liability: The profits from traditional corporations may be "double taxed." That is, the corporation itself is taxed for any profits earned, and any individual stockholder who earned profits from the corporation (in the form of paid "dividends") are also taxed. This occurs most often in larger corporations, and may not be an issue for stockholders and owners of smaller corporations, who often work for the business itself and are paid salaries (which are tax-deductible for the corporation) rather than dividends. One solution to the double-taxation problem is electing "S" corporation tax status.Still Unsure About Whether to Incorporate?



    The East India Company (EIC), also known as the Honourable East India Company or the British East India Company and informally as John Company,[1] was an English and later British joint-stock company,[2] which was formed to pursue trade with the East Indies but ended up trading mainly with the Indian subcontinent and Qing China.Originally chartered as the "Governor and Company of Merchants of London trading into the East Indies", the company rose to account for half of the world's trade, particularly in basic commodities including cotton, silk,indigo dye, salt, saltpetre, tea and opium. The company also ruled the beginnings of the British Empire in India.[3]The company received a Royal Charter from Queen Elizabeth on 31 December 1600,[4] making it the oldest among several similarly formed European East India Companies. Wealthy merchants and aristocrats owned the Company's shares.[5] The government owned no shares and had only indirect control.The company eventually came to rule large areas of India with its ownprivate armies, exercising military power and assuming administrative functions.[6] Company rule in India effectively began in 1757 after theBattle of Plassey and lasted until 1858 when, following the Indian Rebellion of 1857, the Government of India Act 1858 led to the British Crown assuming direct control of India in the form of the new British Raj.Despite frequent government intervention, the company had recurring problems with its finances. The company was dissolved in 1874 as a result of the East India Stock Dividend Redemption Act passed one year earlier, as the Government of India Act had by then rendered it vestigial, powerless, and obsolete. The official government machineryof British India had assumed its governmental functions and absorbed its armies.
  22. South Seas Company
    Corporation

    Had a monopoly to trade with spanish colonies of south america 

    Scam from the very beginning.... no one knew anything about south america.  

    • They were at war with Spain.
    • People bought in.... stock price went up and up and up and up.... the stock rose 600% however the company was never able to become profitable.  Stock price plummets... people were out their life savings.  One of the directors was shot.  King came back from summer vacation to deal with it.

    This painted the public's opinion of corporations as horrible



    The South Sea Company (officiallyThe Governor and Company of the merchants of Great Britain, trading to the South Seas and other parts of America, and for the encouragement of fishing)[1] was a British joint-stock company founded in 1711, created as a public-private partnership to consolidate and reduce the cost of national debt. The company was also granted a monopoly to trade with South America, hence its name. At the time it was created, Britain was involved in the War of the Spanish Successionand Spain controlled South America. There was no realistic prospect that trade would take place and the company never realised any significant profit from its monopoly. Company stock rose greatly in value as it expanded its operations dealing in government debt, peaking in 1720 before collapsing to little above its original flotation price; this became known as the South Sea Bubble.The Bubble Act 1720 (6 Geo I, c 18), which forbade the creation of joint-stock companies without royal charter, was promoted by the South Sea company itself before its collapse.
  23. Who are the persons involved in Salomon Vs Salomon?
    Aaron Salomon - Shoemaker with a great contract (with the british army), he decides to incorporate. He sells his shoe business to Salomon and Co limited.

    Salomon and Co limited.  The incorporation created.  Salomon and Co limited writes a contract saying that it owes Aaron Salomon  money which is owed (as  a security to be paid first should things go bad). To survive Salomon and Co takes out more and more loans.  

    Salomon's sons are losers.

    Creditors - go to Salomon and Co and say that he needs to pay them.  They are unhappy because they believe Salomon has paid himself rather than the creditors.  


    Ruled in the favour of Salomon because the corporation paid Aaron Salomon the person.  There was no payment of one's self.  This illustrates the power of separate legal entity.
  24. What is the legal status of corporations?
    • ¡¡LIMITED LIABILITY¡
    • SEPARATE LEGAL PERSONALITY
    • ¡TRANSFERABILITY OF SHARES
    • Assists in perpetual existence¡
  25. Who are the persons involved in Lee v. lee’s air farming ltd.
    Jeffery Lee is the sole shareholder, office, employee, everything.

    Jeffery Lee's Wife - His wife, the poor widow, claims WCB for his death (he died during the job).  

    NZ Ruling  - it is impossible to be an employee of one's self.  He's not an employee at all and therefore not eligible for WCB.  

    Privy Council - Disagree - they are separate legal entities.  he invoiced himself, he paid himself... etc .. and therefore was an employee of the company.
  26. Choice of jurisdiction
    Cruise industry takes in 11 billion in profit a year.

    They pay 1.1 percent in tax a year.

    The average employee works 98 hours a week and make ~500 a month for a 360 hour work month.

    They can do this because they are not registered in the states or Canada.  If they did, they would be burned by Canadian laws.  They are registered in Liberia.  Because they have super low tax rates and labour codes.

    Many companies will choose a country that is beneficial to them (e.g. Tim Hortons and Wendy's).


  27. 50%+ of publicly traded corporations in the United States, and 60% of Fortune 500 companies are incorporated in… what state?
    Deleware. 

    Because it has a very favourable jurisdiction to do business.
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Law Class 2: May 12
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Law Class 2: May 12
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