MGT393H5 Study Guide - Midterm Guide: Automotive Lighting, Contributory Negligence, Brad Paisley

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Published on 6 Apr 2014
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MGT 393/RSM 225 WINTER 2014- MIDTERM general guide this is not intended to be a sample
response but rather a general guide to issues that could be identified and discussed.
A client, TailorSwifft, has attended at your office. The client explains that her sister, Carrie, was married to a
National Hockey League player, Jacque Underwooden. Tailor, Carrie and Jacque were all from a small town
outside of London, Ontario. In 2009, Tailor and Carrie decided to open up a cupcake/bakeshop called
Underwooden Cupcakes”. In order to proceed, it was decided to incorporate a company,Underwooden Foods
Limited (“UFL”). Tailor received 40 Class Avoting common shares of UFL and Carrie received 40 Class B voting
common shares of UFL and Jacque received 20 Class C voting common shares of UFL. The share attributes
were identical for each class; different classes were issued to provide some flexibility for tax planning. Tailor
and Carrie were each initially elected as Directors, and Carrie was appointed President and Tailor, Vice-
President. Jacque took on no active role inoperations, as he was primarily “the brand” (that is, he was a well-
known professional hockey player). The two sisters essentially agreed to have an equal say in decision
making.POSSIBLE ISSUE Although we have not taken contract law yet in the course students could
consider if this a “shareholders agreement”. Analysis could integrate into challenge some of the
actions taken by Carrie later. UFL initially opened a store in Masonville, a large shopping mall in London,
Ontario and subsequently a second location was opened at a highway stop on Highway 401 near Kitchener.
Both locations were highly successful and generated significant sales, profits and cashflow. As a result, in
October 2013 Underwooden Cupcakes caught the attention of Jim Tremclo, a successful businessperson, who
also controlled the large franchise chain, Boston Italian Restaurante. Jim met with Tailor and Carrie and told
them that he was interested in investing in UFL, and wanted to turnUnderwooden Cupcakes into a franchise
chain of stores. He saw no reason why it could not be as successful as Tim Horton’s over time. Jim suggested
that they carry on for a bit longer before he invested and they started franchising, in order to fully establish a
successful “track record”. Ontario law requires a franchisor to provide full disclosure to a potential franchisee
and Jim thought it critical that the stores have a longer operating period/history before franchising
started.Relevant fact Opportunity to possibly get involved with Jim/franchise was made to both Tailor
and Carrie (Directors/officers)
All is not well. A few months ago, Tailorhad an affair with Jacque. Although they went to great lengths to keep it
“a secret” Carrie found out in late December 2013. Jacque and Carrie have two young children and a
generally happy family life. Jacque and Carrie wanted to “save their marriage”. Jacque felt so badly about the
affair he had with Carrie’s sister, he gave Carrie his 20 Class C shares in early January 2014 as a sign of his
love and “goodfaith”.Relevant fact Carrie now becomes a majority shareholder.
Aside Note: Though it is common for certain restrictions on transfer to be included in the Articles of Incorporation
or even by-laws occasionally, such term is not required by law but utilized as a matter of business and legal
Carrie was willing to forgive Jacque, but could not forgive her sister for what had happened. In mid-January
2014, Carrie met with Jim and his team of legal advisors.Relevant fact Carrie is intentionally planning a
strategy to essentially “freeze out” and potentially “oppress” Tailor. Motivation is not “best interest of
the corporation” Based on the meeting, the following strategy was implemented:
Carrie held a Board of Directors meeting with only her in attendance and with her 60 shares/votes - elected
herself as the sole Director. The Board then terminated Tailor as VP, despite the fact that she was doing
important work;Relevant fact Would not just be a Board meeting but also must have been a
shareholders meeting if they elected Carrie as a sole director. As all shareholders are the same
all should have received notice of shareholder meeting. POSSIBLE ISSUE Validity of Carrie as
Sole Director; Analysis: The election of Carrie as a sole director was not completed by way of a
proper shareholder meeting; failed to comply with the Act. Impact could be that subsequent actions
taken by Carrie in her capacity as sole director are not valid (including the termination of Tailor.)
This issue impacts other. Going forward this will not be repeated below and assumed specific
actions taken would be analyzed) [Aside not expected of a bus law student Tailor my have
some rights under employment law as well for wrongful dismissal]
The Board then declared a dividend on the Class C shares, equal to the amount of cash in UFL; Relevant
fact nothing to indicate that this dividend violates solvency test or capital maintenance test. May
be generally indicative of a more “oppressive” behaviour.
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Jim and Carrie then incorporated a new corporation, Boston Bakeries Inc. (“BBI”) with the two of them as
equal shareholders. BBI then purchased all the assets (intellectual property, location leases) from UFL at
fair market value. The sale to BBI was approved by Carrie as sole director of UFL. BBI is now in the
process of developing a franchise system for the trademark Underwooden Coffee and Bakery”. BBI has
since opened six new Underwooden Coffee and Bakery - locations;POSSIBLE ISSUE: Dealing with the
fundamental change. Analysis The sale of all the assets of UFL would constitute a fundamental
change. OBCA provides that a vote must be held to approve; If Tailor dissent entitled to have
purchased at fair value. Conclude As this was not in accordance with OBCA consider order for
Aside Note: In respect of the fundamental change, a special resolution would be necessary for its approval
such that Carrie having only 60% of the shares of UFL would not be able to unilaterally approve the change.
FURTHER ISSUE: Breach of fiduciary duty. Analysis Jim and Carrie working together; shifting of
the business concept and assets to BBI →→→ 1. Taking of corporate opportunity; 2 conflict of
interest; 3. Failure to act as an officer and director in the best interest of the corporation; failure to
act honestly; good faith EXPAND Corporation has been harmed by these actions DISCUSS
DERIVATIVE ACTION (criteria likely can be met so Tailor can request authority to commence
action in name of the corporation; may also be able to sue BBI;; OPPRESSION REMEDY these
events plus all other unfairly ignores Tailor; are oppressive;
After paying all the creditors of UFL, the surplus cash in UFL was distributed as a “special” dividend to the
Class B shareholders;Relevant fact appears that UFL did pay their creditors. Dividend paid not
likely a violation of solvency test or capital maintenance. (if a student discusses these tests may
indicate that they did not understand the tests and/or use the case facts)
UFL continues to exist as a corporation, but it is inactive.
When Tailor tried to talk to Carrie, Carrie told her that the two of them were once partners and now - if she did
or said anything further, Carriewould have UFL commence a lawsuit against Tailor for breach of fiduciary duties.
Aside interesting they are sisters they were also shareholders nothing to indicate that they were
partners. Having an affair is not a breach of fiduciary duties in the business entity context.
Note: If it is a corporation, then according the Partnership Act, it cannot be a partnership.
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. R.S.O. 1990, c. P.5, s. 2.
ROLE/REQUIRED IS IN THIS PARAGRAPH →→Tailor does not have an understanding of law, and more
specifically corporate law. At this point, Tailor finds herself unemployed and broke. Her general sense is that
Carrie cannot do what she has done. She knows that Carrie will soon be a multi-millionaire in her own right (she
is already a millionaire by virtue of being married to an NHL player). Tailor would like you, BeaCalm, to prepare
a memo to her that analyzes each of the actions taken by Carrie and others and discusses any
corporate law implications regarding the actions taken. Tailor would also like to receive your specific
advise as to how she should proceed, if at all.
Advice to proceed retain a lawyer seek to 1. Obtain an order for compliance (e.g. failure to hold
proper vote etc. 2. Seek approval for derivative action (failure of directors to act properly; Notice; best
interest of the corp); 3. Commence oppression remedy (based on analysis); 4. Sue Carrie various.
Tailor also has another serious issue. About a month ago,Tailor was a passenger in a Honda Accord driven by
her old boyfriend, Brad Paisley. The two were off to see a late night play at the Milton Theatre. On the way to
the performance, Brad noticed that the Honda was getting low on gas. The gas station that he planned to stop at
to get fuel was closed so the two decided to continue to the theatre. The night was very dark and misty, to the
point that the windshield wipers had to be used intermittently. There was also fog. While driving down a winding
rural road with no streetlights, the Honda ran out of gas. Brad was able to steer the car off the paved portion of
the road to the shoulder. Brad then called his sister, who lived about 30 minutes away, and asked her to bring
gas to where they were stranded. The lights were off on the Honda so Tailor suggested to Brad that he turn on
the car’s four way flashers (hazard lights). Brad said that would be silly. Tailor did not turn them on herself
because she thought Brad would just get angry and turn them off.(relevant fact for a potential breach [or
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Document Summary

Mgt 393/rsm 225 winter 2014- midterm general guide this is not intended to be a sample response but rather a general guide to issues that could be identified and discussed. A client, tailorswifft, has attended at your office. The client explains that her sister, carrie, was married to a. Tailor, carrie and jacque were all from a small town outside of london, ontario. In 2009, tailor and carrie decided to open up a cupcake/bakeshop called. In order to proceed, it was decided to incorporate a company,underwooden foods. Tailor received 40 class avoting common shares of ufl and carrie received 40 class b voting common shares of ufl and jacque received 20 class c voting common shares of ufl. The share attributes were identical for each class; different classes were issued to provide some flexibility for tax planning. Tailor and carrie were each initially elected as directors, and carrie was appointed president and tailor, vice-

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