Business Organizations & Real Contexts Talk 2 LAW 459 003 BUSINESS ORGANIZATIONS Allard School of Law, UBC Fall, 2016 Jon Festinger Q.C. Festinger Law & Strategy http://bizorg.allard.ubc.ca @jonfestinger jon@fblawstrategy.com

Good Morning LAW 459 003 BUSINESS ORGANIZATIONS

Lecture Capture Mondays

Course Website http://bizorg.allard.ubc.ca

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Thanks for the posts!! (Wednesday)

News of the “Week”…

Now Back to Our Regularly Scheduled Programming…

UNIT 1: INTRODUCING BUSINESS ORGANIZATIONS & THEIR REAL WORLD CONTEXTS

Legal Framework

The course in one picture

Context

Problem 1 = Artificiality Platonic forms

The Trinity Who is the corporation? Problem 2 = Confusion Roles of Management Roles of Directors Roles of Shareholders Who is the corporation?

Impacts… Ethics Governance Pierce the corporate veil? Regulate?

Add one more thing to the mix..

Triggering “reality” as often as not…Creditors

Footnote on “financial business” growth

Some comments (more next class)

Methodologically different from…

Anthropomorphization which comes with corporate “personhood” is the jumping off point. Since a company is a person, then inevitably it would be a psychopathic person because it’s core needs and pursuits are money and power.

Anthropomorhization

Monkeys are “persons” too.

The Robot Analogy

There is a key difference…

The corporate form only exists only in accordance with the law The corporate form only exists only in accordance with the law. It is quite literally a creature of statute. Yet somehow it seems no less dangerous. H.R. Giger – Necronom IV

Corporate Persons as Psychopaths

The legal Impetus Dodge v. Ford Motor Company, 170 NW 668 (Mich. 1919) “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 the non-distribution of profits among stockholders in order to devote them to other purposes...”

More coming…

Contra (but ending in same place): Evil is structural not personal

Is not the conclusion then: If companies are inevitably psychopathic “by nature”, then their conduct must be regulated. If companies structures can be “evil”, then their conduct must be regulated.

Are our legal constraints on corporations effective in preventing (not redressing) evil and/or corporate psychopathy???

You will decide.

Tougher than the question What are “solutions”? Not anthropomorhizing Redefining corporate purpose Regulation ????????????

So please remember the question as you go through the course…

How corporate personhood is constituted Canada Business Corporations Act R.S.C., 1985, 15 (1) A corporation has the capacity and, subject to this Act, the rights, powers and privileges of a natural person. Business Corporations Act [SBC 2002] 30 A company has the capacity and the rights, powers and privileges of an individual of full capacity.

QUESTIONS? DISCUSSION?

Next: Some Introductory Notes

Who? Players in corporate “capacity”: Trinity of Shareholders, Directors & Management. Corporate law generally regulates those relationships. Players in corporate “existence”: Trinity of Shareholders, Directors & Creditors. Corporate law generally regulates those relationships. From a legal perspective corporate law is not much interested in employees, suppliers and customers (unless they are not paid and are in effect Creditors.

Players in corporate “capacity”: Trinity of Shareholders, Directors & Management. Corporate law generally regulates those relationships. Players in corporate “existence”: Trinity of Shareholders, Directors & Creditors. Corporate law generally regulates those relationships. From a legal perspective corporate law is not much interested in employees, suppliers and customers (unless they are not paid and are in effect Creditors.

Elsewhere though…

Shares

Rights of shareholders not generally defined by company law but by contract – the Shareholders Agreement. Almost infinitely sliceable & dice-able (like copyright). Factors in deciding what types of shares to create/issue include market conditions, investor requirements, tax consequences etc. Variables in shares can include Voting Non-voting Common Redeemable Preferred (Dividend) Subordinated

The Main Privilege of Corporate Personhood? – Limited Liability

Compare & contrast… “That corporate person over there owes you the money, not me!” Lenders’ (aka creditors) rank ahead of Shareholders in distributing the assets (logical if you think about it) Completely different from a Sole Proprietorship or a Partnership which has complete liability (and in the case of Partnership “and then some”.

Five core characteristics Underlying Company Law The company an entity distinct from all its shareholders. Limited liability for shareholders. Specialized management, “separate” from the shareholders. Freely transferable shareholder interests. Shareholder control.

1. The company an entity distinct from all its shareholders. Relations between the key groups – directors/managers, shareholders and creditors – not generally directly contractual but mediated through the “company” e.g. directors obligations are owed to company, not individual shareholders; and individual shareholders generally do not have rights against directors – their rights are against “company”. Directors owe fiduciary duties to “the company”. Does this mean they have a duty to themselves? No it doesn’t.

2. Limited liability for shareholders. Policy reason for limited liability – limited liability encourages investment by those who do not wish to be involved in management. Countervailing consideration – reality suggests (as is pointed out frequently in “The Corporation”) that limited liability may permit, or even encourage, opportunistic behaviour by controllers of company.

The psychology of it… Think of your last summer job. Didn’t the company (if it was large enough) feel like it had an identity separate from management, employees and everyone else you came in contact with? You are part of it and separated from it, all at the same time. Corporate Responsibility v. Personal Accountability.

3. Centralized Management This “feature” is the norm, but law does not require a centralized management structure or any particular form of structure. Perhaps strangely, company law in Canada says relatively little about the qualifications (and disqualifications) of directors, at least in the case of private companies. 

4. Shareholder control

Traditional company law view – shareholders are ultimate repository of authority.  This is reflected in control over the company’s: Constitution (“Articles of Incorporation” in BC, “Bylaw” federally & in Ontario); management; and surplus assets.

5. Transferability of Shares Transferability is crucial for two reasons: flexibility and liquidity for investors. governance considerations – company will function more smoothly if dissatisfied investors can leave. Despite importance of market and liquidity, company law does not guarantee: Existence of a market; or That shares may be transferred freely – consents, restrictions, may apply

QUESTIONS? DISCUSSION?

The Corporation – Your takes Jon’s Corporate Adventures in TV Land Wednesday: Film & TV The Corporation – Your takes Jon’s Corporate Adventures in TV Land

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